A Ponzi scheme is named after Charles Ponzi (1882–1949), an Italian-born swindler who became notorious in the United States during the early 1920s. The term’s origin is directly tied to a fraudulent investment operation he engineered that promised extraordinary returns in impossibly short timescales.

Historical Context:

Charles Ponzi arrived in the U.S. in 1903, eventually settling in Boston. By 1919, he claimed to have discovered an arbitrage opportunity using International Reply Coupons (IRCs)—a form of prepaid postage voucher—to profit from differences in postal rates between countries. He convinced investors he could generate a 50% profit in 45 days, or double their money in 90 days. While the notion appeared legitimate on paper, Ponzi never actually carried out the complex exchange of coupons in any meaningful volume. Instead, he used money from newer investors to pay earlier investors their “profits,” cultivating the illusion of a thriving enterprise.

Eponymous Origin:

The scheme unraveled in 1920 when authorities examined Ponzi’s finances and discovered that the supposed returns were simply redistributions of incoming funds rather than genuine profits. Although he was not the inventor of such frauds—similar deceptive models date back centuries—his operation was so high-profile and captured so much media attention that his name became forever linked with the concept.

Etymological Development of the Term:

The phrase “Ponzi scheme” entered the lexicon as journalists, economists, and eventually legal and financial professionals used his name to describe any investment scam predicated on using new investors’ capital to pay returns to earlier investors. Over time, “Ponzi scheme” became a common financial shorthand for this kind of fraudulent cycle, embedding the legacy of Charles Ponzi’s swindle into the English language and financial discourse worldwide.