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The Pyramid

The pyramid scheme is also known as the Ponzi scheme, named after Charles “Carlo” Ponzi. An immigrant to Boston from Italy, Ponzi embarked on a scheme that ultimately would result in legend. In 1920, he devised a scheme in which he paid exorbitant interest on notes that allowed people to double their money in a matter of months. When an early depositor cashed out, Ponzi merely used the money others were depositing to pay off the withdrawal. There were no investments behind the notes. He merely robbed Peter to pay Paul. He eventually got caught, and thousands lost their money.

In a pyramid or Ponzi scheme, the money paid in by later investors is used to pay artificially high returns to early investors. As long as a sufficient number of new investors contribute to pay earlier investors, the pyramid will continue and grow. When the number of new investors diminishes, whatever money is left usually disappears with the pyramid operators. The pyramid collapses and the later investors lose their money.


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