He created an illusion of a successful business by using the money brought in by new investors to pay off the old investors.Įssentially the capital of the scheme was used to pay interest.
Ponzi's scheme ran into execution problems. On the August 10, 1920, the scheme collapsed. At its peak, the scheme had 40,000 investors, who had invested around $15 million. Ponzi started an investment scheme to cash in on this arbitrage opportunity and promised to his investors that he would double their money in ninety days. The year was 1919 and during the course of launching an export magazine, Ponzi realized that a huge arbitrage opportunity existed because the international postal reply coupons did not seem to follow the law of one price. Charles Ponzi, an Italian, who landed in the United States, attained immortality with what is now called the Ponzi Scheme.
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