The story of the first Ponzi, the Ladies’ Deposit
Happy Independence Day, Everyone!
To be independent means to be free. Are we free?
I declare that we are truly free or independent only if we find the least among us being able to free themselves from ignorance, poverty, and tyranny.
Ignorance, poverty, and tyranny work together to make many of us become willing victims of frauds. That is why Kapa and many other similar ventures exists using what is known as Ponzi scheme.
For a P10,000 donation, Kapa promises to give P3,000 or 30 percent as a love gift to the donor after only a month of waiting. Such a huge gift is impossible to sustain if based on normal business profits alone.
Assuming there are 100 donors and every donor donates P10,000 in the first month, Kapa generates one million pesos. If in the second month, Kapa generates another one million from another 100 donors, it can easily give the 30 percent gift to the initial 100 donors, which would amount to only P300,000. After deducting for the month’s expenses in personnel and other overhead expenses, the rest is profit for the month to the organizers.
Now with 200 existing, in the third month Kapa must provide P600,000 in gifts this time. That is not a problem if another 100 donors will come in the third month generating another one million in cash.
In the fourth month and with 300 donors already in the list, Kapa must pay out another P900,000 in gifts. Again, if another 100 donors will come with one million in total donation, there is no problem meeting this.
In the fifth month, however, 100 new donors with one million in donation will not be enough to pay for gift of the 400 existing donors, which now amounts to 1.2 million pesos. Thus, beginning in the fourth month, Kapa must endeavor to get more and more donors and donations every month.
Such a scheme will work for a time but a point will come when the number of existing donors will be so large that the money generated from the new donors will not be enough to meet the required gifts.
It is even worst in Tagum City, Davao del Norte, where one company, Rigen Marketing, promises a payout of P20,000 after one month for every P5,000 investment or pay-in. How can that be sustain without an exploding number of new members every month?
The Kapa and Rigen system is a classic Ponzi scheme in which belief in the success of a nonexistent or phony enterprise is fostered by quick payment of high returns to the first investors or members from money invested by new investors or members. When less or no more new investors will come, the system disintegrates.
The scheme is named after Charles Ponzi, an Italian, who became notorious for using the technique in the 1920s in the US and Canada.
In the late 1800s, Sarah Howe did the same thing in Boston through the “Ladies’ Deposit.” This is the first real Ponzi scheme.
Howe, at age 53 in April 1879, created the Ladies’ Deposit. She enticed the women to make their deposits by advertising it as a charitable organization, a safe financial haven for women only. Previous members must refer new members. Believing in the idea, wealthy female benefactors often set up accounts to benefit needy women in the Boston area.
Howe promised 8 percent in interest a month. This rate allows for a doubling of the initial deposit in just nine months, which attracts many women.
Howe instituted a rule in the Ladies Deposit that allows members to withdraw only their interest earnings. She claimed to use this rule to keep women from spending their money frivolously.
This rule prevented large withdrawals and allowed Howe to fund her scheme by using initial deposits from new members to pay for the interest of previous members.
As long as more women join the Ladies’ Deposit, Howe’s investment plan could continue without a problem. In September 1880, the Boston Daily Advertiser initiated an investigation into the Ladies’ Deposit, leading to the destruction of Howe’s plan in three weeks.
The inquiry exposed the fragile nature of the Ladies’ Deposit, scaring many investors. This led to a run on the Ladies’ Deposit. Boston authorities soon went after Howe, who, with her finances in disarray, could not even pay her $500 bail.
Howe spent 3 years in prison for creating and sustaining the Ladies’ Deposit.
Disclaimer: The comments uploaded on this site do not necessarily represent or reflect the views of management and owner of Cebudailynews. We reserve the right to exclude comments that we deem to be inconsistent with our editorial standards.