Economic historian John Steele Gordon has a fascinating article in the WSJ entitled "Pyramid Schemes Are as American as Apple Pie." In it, he defines "Ponzi scheme," a word I've heard a lot but never had a clear understanding of.
Ponzi schemes are scams where "early investors are paid dividends out of the money put in by later investors." No real capital is created, however, so it eventually falls apart. It's more commonly referred to as a pyramid scheme, which WordNet defines as "a fraudulent scheme in which people are recruited to make payments to the person who recruited them while expecting to receive payments from the persons they recruit; when the number of new recruits fails to sustain the hierarchical payment structure the scheme collapses with most of the participants losing the money they put in." Ponzi schemes are named after Charles Ponzi, who cooked up such a pyramid in 1919.
As for Ulysses Grant, read the whole thing for how he found himself an anachronistic victim of Mr. Ponzi. It's a great story.
Ponzi schemes are scams where "early investors are paid dividends out of the money put in by later investors." No real capital is created, however, so it eventually falls apart. It's more commonly referred to as a pyramid scheme, which WordNet defines as "a fraudulent scheme in which people are recruited to make payments to the person who recruited them while expecting to receive payments from the persons they recruit; when the number of new recruits fails to sustain the hierarchical payment structure the scheme collapses with most of the participants losing the money they put in." Ponzi schemes are named after Charles Ponzi, who cooked up such a pyramid in 1919.
As for Ulysses Grant, read the whole thing for how he found himself an anachronistic victim of Mr. Ponzi. It's a great story.
[EDIT: Can anyone help me? Is their a difference between ponzi schemes and pyramid schemes? Can a pyramid scheme be legitimate, like selling Mary Kay cosmetics?]
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