The Eponymous Mr. Ponzi

The little-known story of an age-old scam… Published by Damn Interesting on September 2, 2019

Nobody knows who did it first. Swindlers have been pulling off the scam for centuries, paying existing investors with the deposits of new ones to create the illusion of an incredibly profitable investment opportunity. Before 1920, it was known as “robbing Peter to pay Paul” or “the Peter-to-Paul scheme.” For example, Sarah Howe, a fortune-teller and frequent guest of the State Lunatic Asylum in Massachusetts, employed it in 1880 to take in nearly $500,000 from her followers. In 1884, former president Ulysses S. Grant fell victim to such a scheme that left him penniless.

But it was Charles Ponzi who, in Boston in 1920, earned permanent naming rights to the scheme by dazzling the investing public and dumbfounding authorities like no other. That sweltering summer, Bostonians of every stripe were all but begging this diminutive investment banker to take their money for an unheard-of return: 100 percent in 90 days. In less than a year, Ponzi raked in nearly $7 million⁠⁠—more than $90 million in today’s dollars. His downfall came as swiftly as his meteoric rise.

Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi was born on 03 March 1882 in Lugo, Italy. His father, a postal worker, died when Carlo was ten, leaving the family without a breadwinner. His mother, Imelde, was descended from Italian aristocracy. She sent Carlo to the University of Rome with just enough money to earn a degree, and high hopes he would use it to prosper and restore the family to its erstwhile rank in society.

Carlo dashed any such hopes. He loved college, 500 miles from home, but not for the education. There he enjoyed the life of a bon vivant, skipping classes and befriending students from more privileged families. He spent much of his money on fine dining and equally fine clothing, and by picking up more bar tabs than books. He returned home penniless and diploma-less.

Determined to patch things up with his unhappy mother, Carlo vowed to sail to America, scoop up some of the gold rumored to line its streets, and become a very rich man. He left Naples on 03 November 1903 with $200 in his pocket. He arrived in Boston with $2.50, the balance in the pockets of cardsharps who earned their living from unsuspecting immigrants on ships.

Ponzi found making money in America rather harder than he’d expected. For nearly four years, he worked as a grocery clerk, factory hand, dishwasher, waiter, and painter. He did repair work, folded laundry, and anything else to keep food in his belly. He took the first name Charles and a variety of surnames other than his own, including Bianchi, Ponsi, Ponci, and Ponce.

Ponzi did not limit his job search to Boston. Willing to go anywhere for employment that exercised his mind and not just his back, he found it in Montreal in July 1907. There, a man by the name of Louis Zarossi hired him as a bank clerk after a 5-minute interview. He fit right in at Banco Zarossi, which did a booming business catering to the Italian immigrant community and paying 6 percent interest to depositors⁠⁠—three times the rate other banks offered. And he did so in a most unscrupulous manner.

Among Zarossi’s customers were not just depositors but immigrants who gave him money to wire home to family in Italy. Some of these funds he simply stole, using it to pay his depositors their promised 6 percent. It could take months for wire customers to complain, and when they did he pleaded ignorance and laid blame on the receiving end. Nobody can say exactly how much Zarossi stole in this manner, but in July 1908, he filled a suitcase with cash and fled to Mexico.

Again out of work and tired of earning money in the conventional manner, Ponzi one day entered the office of the Canadian Warehousing Company, a former Banco Zarossi customer. The office staff knew and trusted Ponzi. While nobody was looking, he located their company checkbook, removed a check, and slipped it into a pocket. Later, he wrote it out to himself in the seemingly authentic amount of $423.58, then carefully forged the signature.

After cashing the check and visiting a number of clothiers to outfit himself in style, Ponzi found his buying spree short-lived. Bank officials suspected the authenticity of the check’s signature. They contacted the police, who had little trouble finding and arresting him. He feigned mental illness by chewing a towel to shreds, then wildly climbing a wall toward a barred window. Convincingly calmed by a straitjacket, he earned an upgrade to the infirmary by persuading his jailer he suffered from epilepsy. His insanity act only went so far. Ponzi was ultimately sentenced to a three-year term at the Saint-Vincent-de-Paul Penitentiary, his jailers settling on the name of Charles Ponsi.

At the penitentiary, he crushed stone, slept on a bed of corn cob husks, and shared a cell with an especially nasty convict named Louis Cassullo. Ponzi would later describe him as “one of those prowling, petty, sneaky thieves whose counterparts in the animal kingdom are the hyenas and the jackals.” After serving a term shortened to 20 months for good behavior, Ponzi was only too happy to bid farewell to his unpleasant cellmate.

Not three weeks later, after living with friends and doing odd jobs to earn a bit of money, Ponzi hopped on a train headed back to the U.S. Sitting with him were five other Italians, all recent immigrants who spoke no English and lacked proper papers. They appreciated his company, advice, and interpretation skills, all of which he would soon regret providing. When a customs official questioned the group, Ponzi was assumed to be their leader, despite his protestations that he did not know the men. Bias against immigrants of Italian origin⁠—also known as Anti-Italianism⁠—was the discrimination du jour. Ponzi was arrested on charges of smuggling aliens. At trial, prosecutors secured a conviction, aided by the testimony of the other Italians, each of whom testified against Ponzi in return for their release.

Ponzi was sentenced to two years at the federal penitentiary in Atlanta. Upon release, he wandered the Southeast U.S. for the next five years working a variety of jobs⁠⁠—bookkeeper, translator, painter, librarian⁠⁠—before finding himself back in Boston.

There, in 1917, Ponzi landed a most promising job as a clerk for the J.R. Poole Company, an import/export firm. His job was to keep track of foreign operations. The starting pay of $16 a week was not great, but soon rose to $25, and then $50.•     •     •

In May of 1917, Ponzi met and married Rose Gnecco, the daughter of a produce merchant. Rose enjoyed their modest, newlywed lifestyle. But Ponzi was determined to make her the wife of a millionaire. “I want you to be able to throw away a hundred dollars,” he told her.

In September 1918, Ponzi quit his job at J.R. Poole to help run his father-in-law’s failing produce business. Ponzi was confident he could turn things around and turn the shop into a commercial empire with himself at the helm. Instead, the business quickly went into bankruptcy. Ponzi found himself again out of work, but not out of ideas for getting rich, this time as a commodities broker.

Unfortunately, the first commodity he tried to sell apparently belonged to someone else. In May 1919, authorities served Ponzi a warrant for stealing 5,387 pounds of cheese. It’s unknown whether the warrant was warranted. As the investigation got under way, Ponzi feared that once authorities learned of his two prison sentences, he might be deported. He feared too that Rose would learn of his criminal past, in the mistaken belief she did not already know. During their engagement, his mother had told Rose all about his prison stints, and both women decided not to tell him Rose was privy to his past. But Ponzi had a lucky break⁠—a misspelling of his name on the cheese charge court documents, as “Charles Pouzi,” led to the dismissal of charges.

Ponzi then decided to publish an international trade publication he called the Traders Guide, in which advertisers would pay for listings seen in every corner of the world. So confident was Ponzi in his new scheme that he rented office space, bought $350 of furniture on credit from the Daniels & Wilson Furniture Company, and hired a small staff.

Ponzi quickly exhausted his meager savings. To keep the operation afloat, he applied for a loan at the Hanover Trust Company. Henry Chmielinski, the bank’s president, turned him down personally. Ponzi reminded him he was already a loyal customer of the bank. Chmielinski added an insult Ponzi would never forget: “Your account is more of a bother than a benefit to us. Good day, sir.” Ponzi returned to his office and laid off his staff.

Not long after the demise of the Traders Guide, in August 1919, Ponzi received a letter from a merchant in Spain asking about it. Enclosed with the letter was a curious, official-looking square of paper. It was an International Reply Coupon, or IRC. Created in 1906 by a multinational body of postal services to simplify the international exchange of mail, one could buy an IRC at a local post office and enclose it in a letter sent to any of the participating countries. There, the recipient could redeem it for whatever local postage stamps were required to send a return. Staring at the coupon, Ponzi at last realized how he could make millions. And this time he was right.

International Reply Coupon
International Reply Coupon

Known today as arbitrage, the strategy Charles Ponzi devised was theoretically sound. Owing to interest rate and foreign exchange fluctuations among countries, say the United States and Italy, one U.S. dollar could buy 20 IRCs in Boston⁠⁠—or more than 60 in Rome. Hence Ponzi knew he could have someone buy IRCs in Italy for roughly 1.5 cents each, and send them back to the U.S., where he could sell them for 5 cents each, earning the eye-popping profit of 233 percent⁠—more than enough for him to offer investors a tantalizing 50 percent return in 45 days, or 100 percent in 90, and keep the rest for himself. He just needed funding to get things started.

As Ponzi set about looking for investors, the Daniels & Webster Furniture company came looking for him. He had fallen behind on his payments for his office furniture. With unbridled confidence and charm, Ponzi convinced Joseph Daniels to not only hold off on repossessing the furniture, but to essentially convert his obligation into a loan. Daniels even wrote Ponzi a check for $20 as a further investment in the IRC operation.

Ponzi tried but failed to convince other acquaintances to trust him with their money, including the grocer Ettore Giberti. Giberti was walking out the door after politely declining Ponzi’s offer to invest, when Ponzi sweetened the offer: Invest just $10 and become his first sales agent, keeping 10 percent of whatever Giberti raised. This did the trick. By early January 1920, Giberti had raised $1,770 from 18 investors. More agents soon came on board, as did a modest stream of small investors.

While essentially legal, Ponzi’s IRC idea was in practice absurd. Beyond the problem of how to compete with the U.S. Postal Service for selling stamps, there were simply not enough International Reply Coupons in existence to make any significant profit through arbitrage.

At the end of February 1920, Ponzi owed $2,655 to Giberti’s initial investors⁠⁠—their $1,770 capital plus $885 interest. Ponzi had no arbitrage profits with which to pay them. But he had money from more recent investors, so he simply used that, dipping into funds from Peter, as it were, to pay Paul. He claimed the gains were legitimate, that an associate named Lionello Sarti had gone to Italy and returned with large quantities of coupons, along with the fortunate news there were plenty more to be had. It’s very likely Sarti never existed⁠⁠—nobody other than Ponzi would ever report meeting the man. Ponzi’s satisfied investors didn’t care as long as they were getting paid.

Ponzi saw his February deception as a stopgap, necessary only until he generated the juicy profits that to him were so obviously available through his IRC strategy. When word got out that Ponzi’s word was good, that he actually did pay 50 percent in 45 days, more people clamored to invest. When the next investors were due their interest, he again used the proceeds from the newest investors. And then again and again. The stopgap didn’t stop. And Charles Ponzi would never again have to ask investors for money. From then on, they asked him to take it.

Bostonians literally lined up at the door of Ponzi’s office at 27 School Street to entrust their money with him. In February 1920, Ponzi’s Securities Exchange Company took in $5,290 from new investors. In March, 110 investors turned in nearly $25,000.

Most of the people gathering at his door had only a few dollars to spare. Ponzi tailored his pitch directly to them. Climbing atop the stoop, which helped to augment his 5 feet 2 inches of height, he spun a story of humble beginnings in Italy, of descending the gangplank in Boston with a mere $2.50 in his pocket, then toiling tirelessly in the years since. He intended to build a financial operation that would benefit not Wall Street bankers, he told the mesmerized crowd, but honest and hard-working people just like them.

His populist appeal, playing on fears that rich bankers were keeping exorbitant profits to themselves, would remain the foundation of Ponzi’s pitch. Far from hiding his humble days of barely making ends meet, he was happy to talk with prospective investors about the years of working one menial job after another. It made a moving story. But he left out the part about going to prison for check forgery, knowing it would spell the end of his reputation as a legitimate financier.

So it was with no little alarm that one day he recognized the face of one of the many people applying for a job at his office. It belonged to Lou Cassullo, his former cellmate from Montreal, who had tracked Ponzi down after learning of his success. The man Ponzi compared to a hyena knew very well that Ponzi could ill-afford for anyone to know of his prison past, and Ponzi knew that he knew. Cassullo soon found himself on Ponzi’s payroll, accepting a generous paycheck and helping himself to a few bonus bills whenever he chose. Ponzi wanted him out. With Prohibition in full swing, he once tried to get his new hire arrested by sending him out to buy a few bottles of his favorite whiskey. But Cassullo just returned with the booze.

Whether Cassullo kept his mouth shut or not, Ponzi feared that sooner or later law enforcement would take an interest in his operation. And one day, the Boston police did indeed send two detectives to look it over. Ponzi put on an especially convincing show for the two men, each of whom deemed the plan legitimate, then pulled out their wallets and invested on the spot.

Five police inspectors and a lieutenant would eventually put their money into Ponzi’s Securities Exchange Company, as would hundreds of street cops. Several in fact became agents, earning the 10 percent commission and giving his operation a veneer of legitimacy no money could buy. By the spring of 1920, Ponzi was taking in $30,000 every week. In May alone, 1,525 investors contributed $440,000. In June, nearly 8,000 investors entrusted Ponzi with $2.5 million, equivalent to $32 million today.

A photo from a Ponzi photo shoot
A photo from a Ponzi photo shoot

Flush with cash, Ponzi paid off all of his debts, including $200 he still owed on his loan from furniture dealer Joseph Daniels. He invested in the Splendor Macaroni Company. And the Napoli Macaroni Company. He bought real estate.

It had taken nearly 17 years, but by June 1920, Charles Ponzi had at last made good on his promise to his mother. Now a very rich man, he sent her first-class tickets to sail to America. Imelde arrived to join the Ponzis in their life of American aristocracy at a newly decorated mansion in the affluent town of Lexington, Mass., basking in wealth that only grew with every new investor.

By the end of June, the sheer amount of cash coming in the door at 27 School Street overwhelmed Ponzi’s growing staff. His bookkeeper is said to have put cash into wastebaskets until it could be counted, sorted, and deposited in a bank⁠⁠—minus whatever bills Cassullo deposited into his pocket.

Ponzi could have kept his money at any of Boston’s banks. Curiously, his favorite was Hanover Trust, whose president Henry Chmielinski had rudely turned him down for a loan several months earlier. By June, Ponzi was the bank’s largest depositor, which ensured Chmielinski would never again do anything to risk offending him. Because banks lent out depositors’ money to other customers as loans, a sudden withdrawal by a large depositor would prove disastrous. Well aware of this fact, Ponzi enjoyed his position of power.

As summer got into full swing, with so many Boston police among his happy investors, inquiries into the legitimacy of Ponzi’s operation were minimal. But there were some. In July, U.S. postal authorities issued a formal ban against anyone redeeming more than 50 cents’ worth of IRCs at one time. This made it all but impossible for anyone to turn a large-scale profit by trading in IRCs. But that fact was now moot. By mid-July, Ponzi was taking in $1 million a week, about $13 million in today’s dollars, from investors. He delivered on his promise of exorbitant returns, and to them that was all that mattered.

On the same day U.S. postal authorities issued their ban, a lawyer for furniture dealer Joseph Daniels filed a lawsuit against Charles Ponzi. The suit claimed that, in return for loaning Ponzi some office furniture and giving him a check for $20 back in December, Daniels was entitled to half ownership of the Securities Exchange Company. He wanted $1 million.

Lawsuits for seven-figure sums were still newsworthy at this time. When The Boston Post put it on the front page of its Sunday, July 4 edition, one reader took particular interest⁠—state banking commissioner Joseph C. Allen, a quiet but diligent public servant, whom Governor Calvin Coolidge had just recently appointed to office. Reading about the Ponzi lawsuit, Allen went to Massachusetts Attorney General J. Weston Allen (no relation) to recommend an inquiry. Something about Ponzi didn’t seem right, the newly appointed Allen told the veteran Allen. Sensing a newcomer treading on his turf, the attorney general told the political neophyte to back off. Commissioner Allen eased off as ordered⁠—but his suspicions about Ponzi did not go away.

The Daniels lawsuit had also piqued the curiosity of Robert Grozier, who had recently become publisher of The Boston Post when his father Edwin Grozier fell ill. The younger Grozier never sought nor wanted his father’s position, nor had the son of privilege shown a talent for this or any other job requiring intellectual acumen. He flunked out of Harvard three times⁠⁠—freshman composition had been especially challenging, which is never a good portent for a journalist. Grozier was the first to recognize his own limitations. Out of family obligation, he felt he had little choice but to watch over the venerated Boston Post for his dad.

Ponzi’s dealings with Hanover Trust continued to grow. In addition to keeping most of his money in its vaults, he also began buying the bank’s stock and making friends with other shareholders. When the bank announced plans to issue a new block of 2,000 shares, Ponzi made a visit to Mr. Chmielinksi and offered to buy them all. Chmielinksi refused him⁠⁠—politely this time⁠⁠—on grounds this would give Ponzi control of the bank. This was exactly what Ponzi had in mind. When he made a casual inquiry about his current, very large balance, Chmielinski relented some. He told Ponzi he could buy 1,500 shares. Ponzi accepted. With his ties to other shareholders, who would soon elect him a director and then to a position on the executive board, Charles Ponzi effectively controlled the Hanover Trust Bank. He would soon make plans to put this new power to use.

When news of the stock purchase reached commissioner Allen, he again decided to make an inquiry into Ponzi, with or without anyone’s permission. This time the other Allen went along, sending two assistant attorneys general to join the commissioner in a meeting with Ponzi at the Boston state house.

Ponzi had no legal obligation to comply with the invitation but eagerly attended anyway. His pitch polished to perfection, Ponzi handled every question with aplomb, indeed feeling intellectually superior to the government officials. “I was almost ashamed to match wits with them. It was like stealing candy from a baby,” he would later say. After Ponzi left the meeting, the officials agreed that his strategy seemed plausible and could find no reason to stop him.

Given that investors could only be paid as long as new ones kept showing up, Charles Ponzi was well aware that no Peter-to-Paul scheme could last forever. With the IRC strategy no longer an option and authorities beginning to take interest, he devised a number of plans to go legitimate. Among the most grandiose was a plan to buy Navy ships, mothballed since the end of World War I, and turn them into giant floating showrooms where American manufacturers could bring samples of their wares to foreign ports.

Ponzi did not believe he was doing anything fundamentally wrong by paying off investors with other investors’ capital, convinced that in the end he would meet his liabilities through fully legitimate means. He wanted to be sure the public knew of his legitimate business plans, and to help with that he hired William McMasters, a straight-laced publicist with an exceptionally bright future. McMasters had earned his reputation helping numerous public officials to get elected, including political luminaries such as John F. “Honey Fitz” Fitzgerald⁠⁠—future grandfather of President John F. Kennedy. McMasters began work 23 July 1920.

Charles Ponzi en route to a court appointment
Charles Ponzi en route to a court appointment

On 24 and 25 July, The Boston Post ran back-to-back feature stories on Ponzi and his operation. These were generally upbeat and positive⁠⁠—Robert Grozier carefully avoided printing anything that might bring on a libel suit and put the family newspaper at risk⁠⁠—mentioning only that federal authorities were investigating Ponzi’s operation. But on 26 July, the Post reported the more ominous news that respected financial authority Clarence Walker Barron, whose name remains to this day on the masthead of the financial and investment publication Barron’s, found the plan implausible. The stinging indictment might as well have been a full-page endorsement. In the following days, the number of new investors only grew. Ponzi took in $6.5 million from nearly 20,000 investors that month. To date, nearly 30,000 men, women, and even a number of children had entrusted him with a total of $9.6 million.

While the stories excited investors, Ponzi knew they would also excite additional authorities who would soon come knocking. Rather than wait, he decided to go to them. With McMasters at his side, Ponzi hurriedly arranged meetings with U.S. District Attorney Dan Gallagher, County District Attorney Joseph Pelletier, and Attorney General J. Weston Allen. He did not arrange a meeting with commissioner Allen, convinced that their earlier meeting had assuaged any of his concerns.

With McMasters taking notes, Ponzi made an astonishing offer to each of the authorities: He would open his books to an auditor of their choosing, to prove he had sufficient assets to meet his liabilities. This was of course impossible⁠⁠—but only if he limited the assets to his own.

Ponzi calculated he would need to show $15 million in cash and other liquid assets to prove his solvency. But he had, at most, only half of this amount. For the rest, he planned to simply walk into Hanover Trust when the day of reckoning came and, as a bank director, authorize a most unusual loan to himself. He would then enter the vault, exit with several million dollars of other depositors’ money, take it to the auditor as proof of his liquidity, and then return it the same day.

While the audit got under way over the coming days, The Boston Post stepped up its criticism of Charles Ponzi. It ran an editorial stating flatly their opinion that Ponzi’s scheme could not last. One day, it reported that the New York Postmaster said there were not enough International Reply Coupons in the whole world to make a fortune like Ponzi’s. Then they published another, more detailed analysis by Barron. Why would Ponzi put his own money into investments earning single digit returns, Barron argued, if he could realize 100 percent returns in 90 days? The clear indictment used logic that anyone could understand, and should have been more than enough to convince Ponzi’s investors to flee. But it did not. Nearly all of them stayed.

Ponzi might have thanked Barron for the unintended imprimatur, but instead sued him for $5 million, even laying claims on Barron’s vast farm in case Barron didn’t have the cash. To Robert Grozier’s relief, Ponzi did not sue The Boston Post. But he had fired a shot across their bow, threatening to “own their presses” if they weren’t careful.

While the state auditor, a diligent accountant named Edwin Pride, struggled to make sense of the haphazard record-keeping at the Securities Exchange Company, William McMasters struggled with a personal dilemma. At the meetings where Ponzi had offered to be audited, McMasters noted inconsistencies as his boss moved from meeting to meeting. Thus tipped off, he used the next several days to take a closer look at Ponzi’s operation. It took him no time at all to conclude it was a massive fraud. Knowing his own career was at grave risk, he went to Robert Grozier of The Boston Post with his discovery, offering to write a full exposé. Grozier declined. He had gone as far out on the limb as he could go without risking a devastating lawsuit.

Known for being a straight-laced stickler for the law, McMasters made an exception by going to district attorney Nathan Tufts, who guaranteed that the Post would be immune from lawsuits “in case the story turned out to be untrue and libelous.” When Robert Grozier learned of this promise, he allowed McMasters to publish an astonishing exposé. “DECLARES PONZI IS NOW HOPELESSLY INSOLVENT,” blared the headline. The story went on to describe in detail everything McMasters had seen and concluded.

The next day, a small number of Ponzi’s investors asked for their money back. But the exposé did not make a significant dent in public confidence. Ponzi claimed McMasters did not have access to details of the operation, and was telling this lie to divert attention from the true crime: McMasters had not accounted for $2,000 entrusted to him to place ads. To bolster the claim that McMasters was a thief, Ponzi sued him for that amount. McMasters promptly sued him back for $5,000. The public sided with Ponzi. Within a few days, his operation was more or less back to normal.

Ponzi’s plan to temporarily borrow money from the Hanover Trust vaults might have worked were it not for one miscalculation. Bank Commissioner Joseph Allen had not lost interest in Ponzi at all. Indeed, unbeknownst to Ponzi when he made his offer of an audit, Allen used his authority to call Hanover Trust and instruct them to monitor every dollar going into and out of their vaults and to provide him detailed reports. When those reports further raised his suspicions, he posted two examiners at the bank. When further investigation revealed that Ponzi had clearly overdrawn his checking account, and that bank officials had been conducting illegal operations having nothing to do with Ponzi, Allen posted a sign on the door of the bank: He was taking possession of Hanover Trust and closing its doors until further notice.

When Ponzi found out, he knew there was no way he could rob his own bank. He could only hope now that auditor Pride would miscalculate, or some other stroke of luck would come his way. But what happened next was anything but lucky.

Boston Post reporter had received a most interesting tip: A “Charles Ponsi” was rumored to have spent time in jail in Montreal for forging checks. Dubious of the anonymous tip, Grozier sent a reporter to Montreal to check it out. With photos of Charles Ponzi in hand, the reporter had little trouble finding several people, including the warden of the Saint-Vincent-de-Paul Penitentiary, to identify the man in the photos as the same Charles Ponsi who had spent time in his prison 12 years earlier.

At 1:00 a.m. on 11 August 1920, a Post reporter confronted Ponzi at his home in Lexington about the article being prepared for that day’s edition. Hearing the claim, Ponzi denied being Ponsi and told them not to run the story, else “you are going to get the presses ripped out of your building.” The story ran anyway, encapsulated by its headline: “Montreal Police, Jail Warden and Others Declare That Charles Ponzi of Boston and Charles Ponsi of Montreal Who Was Sentenced to Two and Half Years in Jail for Forgery on Italian Bank Are One and the Same Men.” At an interview with reporters that afternoon, Ponzi changed his response. Yes, he was the man sentenced for that crime. But he hadn’t committed it. He claimed to have taken blame out of mercy, for a crime actually committed by his boss Louis Zarossi, who was struggling to support his wife and children. The impromptu story was so far-fetched that even Ponzi’s own lawyer, standing at his side, resigned on the spot.

The next day, authorities informed Ponzi that Edwin Pride had calculated his liabilities at about $7 million. The official tally would be announced the next day. Ponzi did not wait, and instead turned himself in to the authorities. He was placed under arrest on charges of using the U.S. mail to commit fraud. In public statements, Ponzi continued to portray himself as doing the work of the people, this time by admitting that he did indeed lie about relying on the postal coupon scheme, but only to keep Wall Street bankers from discovering his true operation, which would earn not tens of millions of dollars but more than $100 million. He offered no details. But now it made no difference. A stream of additional indictments soon followed.

A run on a Ponzi bank
A run on a Ponzi bank

In the days that followed, hundreds of investors registered their names as victims, hoping to recover some of their losses. They were aided by numerous more fortunate investors, ones who had received payouts from Ponzi and kindly returned their ill-gotten gains. In the end, roughly 20,000 victims were awarded refunds of just under 40 percent of their investments. Thousands more got nothing but a costly lesson in naïveté.

Charles Ponzi was convicted on federal mail fraud charges and sentenced to five years of prison. In May 1921, while Ponzi enjoyed the nice view of Cape Cod Bay from the Plymouth County Jail, The Boston Post’s publisher Robert Grozier won a Pulitzer Prize, the first awarded outside of New York, for his “courage and fine sense of newspaper honor” in exposing Ponzi. There was no mention that his courage was bolstered by a secret and legally dubious promise of immunity from prosecution. That fact would remain hidden until 2009, when the unpublished memoirs of William McMasters were unearthed in a book shop in New Jersey.

Charles Ponzi’s mail fraud sentence was reduced by one year for good behavior. Upon his release in 1925, state prosecutors took their turn and secured another conviction and prison sentence of seven to nine years. While on bail awaiting his return to jail, and confident he would win an appeal, Ponzi went to Florida and hatched a brand new investment scheme, this time in real estate, and this time offering investors a 200 percent return in 60 days. Florida officials quickly shut it down and arrested him. He was sentenced to one year in prison for violating state securities laws.

Out on appeal for this latest charge, Ponzi decided he could not bear the thought of returning to prison. So he disappeared. With a nationwide manhunt underway, he used his fluent Italian and years of experience as a manual laborer to secure a job as a waiter and dishwasher aboard an Italian freighter. Disguised by a moustache and shaved head, he decided to end the manhunt by faking suicide, asking friends to put some of his clothes and a suicide note on a Florida beach. The ship set sail from Tampa and Charles Ponzi, now using the alias Andrea Luciana, was again a free man.

It was a perfect escape. Almost. After revealing his true identity to a shipmate, Ponzi was in time met by authorities in New Orleans who placed him under arrest. Taken back to Massachusetts, Ponzi served seven years in prison and then, having never obtained U.S. citizenship, was promptly deported.

Back home in Italy, Ponzi struggled to make ends meet doing odd jobs. He spent two years writing his autobiography but failed to find an American publisher. He moved to Brazil in 1939 to take a job for the Italian state airline. When that job fizzled, he operated a small rooming house and taught English in Rio de Janeiro, where, following a steep decline in health, he died in 1949 with a net worth of $75.

Charles Ponzi delivered to the SS Vulcania for Deportation, 1934
Charles Ponzi delivered to the SS Vulcania for Deportation, 1934

Charles Ponzi’s Ponzi scheme was not history’s first. But its ingenuity, audacity, and unlikely success was such that the Encyclopedia Britannica, in 1957, lent Ponzi’s name permanently to the scheme. The Oxford English Dictionary would later cement the term “Ponzi scheme” into the lexicon with its definition: “A form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.“

Ponzi’s scheme was also not the largest in history. That honor (so far) goes to Bernie Madoff, famously arrested in 2008 for defrauding investors of an estimated $65 billion over the course of 16 years, using the same basic ruse of paying off earlier investors using proceeds from new ones. And in the time since the Madoff conviction, the U.S. Securities and Exchange Commission has enforced actions against more than 50 similar schemes.

And those are just the ones authorities have managed to find.

Death by Derivatives

How the opening of a Chicago canal in 1848 led to the birth of modern financial derivatives, and the early demise of some of the men who traded them… Published by Damn Interesting on November 21, 2017

In April of 1873, an unhappy man walked along Clark Street in downtown Chicago. His name was Aymar de Belloy. There was a gun in his pocket, and a nickel – enough for one final glass of beer.

He entered Kirchoff’s tavern and sat at a table, then changed his mind about the beer. He drew his gun, pointed it at his forehead, and pulled the trigger.

The bullet careened along the inside of his skull like a speed skater on a banked turn. It stopped at the left temple, sparing his brain. Belloy rose and staggered to the bar, shaking hands with the horrified men he passed along the way. Upon reaching the bartender, he apologized in all sincerity for the inconvenience he had just caused. Then he collapsed.

Chicago Board of Trade, interior, 1887
Chicago Board of Trade, interior, 1887

Belloy was a speculator, or “plunger” as they were then known, at the Chicago Board of Trade, where traders negotiated contracts for the future sale of wheat and other such goods. The value of these contracts was based on, or derived from, the current price of wheat. Hence they would one day take the name we use today: derivatives.

In the 1870s, with few rules in place, a man could make a fortune plunging wheat. He could also lose a fortune, and with it the will to live. Indeed, the string of early derivative traders taking their own lives grew long enough that one writer gave it a name: the “crimson thread of suicide.”

The scale of today’s derivatives market is almost too vast to comprehend. It’s measured in trillions of dollars. Traders, aided by the most sophisticated software money can buy, place bets ⁠— billions per second ⁠— on the future prices of every manner of stuff. The market hardly exists in any tangible physical sense; most trading takes place across a network of countless devices at data centers around the world.

But in 1873, the global derivatives market was centered in one building on LaSalle Street in Chicago. And it would not have existed at all were it not for the digging of a very long ditch some 25 years earlier.

In 1848, an army of Irish immigrants finished digging the Illinois and Michigan Canal. It was ninety-six miles long and surprisingly shallow⁠—a tall man could stand on the bottom and not dampen his bowler. The canal connected the Chicago River with the Illinois River, which in turn fed the mighty Mississippi, opening an inland waterway from New Orleans to New York. 1848 was also the year Chicago saw its first railway, and stockyard. Its first telegraph and steam-powered grain elevator? Same year.

Indeed, a city’s annus mirabilis (“wonderful year”) doesn’t get much more mirabilis than Chicago’s 1848. These advances would soon turn the city into, well, Chicago, simply by making it so much easier for stuff to move between east and west.

And boy oh boy did stuff thus move: grain, lumber, salt, sugar, pigs, and cattle began floating or rolling into this town on the southern tip of Lake Michigan like never before. There it was unloaded, weighed, graded, sold, stored, and reloaded onto boats or trains heading the other way.

The Historic Illinois & Michigan Canal Corridor, 1851 (via)
The Historic Illinois & Michigan Canal Corridor, 1851 (via)

In March of 1848, a dozen or so businessmen gathered to form an alliance of business interests, or what we would today call a trade association. It was a brilliant idea whose only problem was the apparent lack of anything for these fellows to actually do. Founders of the Chicago Board of Trade were determined to find something, but interest soon began to wane. To persuade members to show up for meetings, the founders began offering a free lunch of crackers, cheese and ale. Lines soon formed at the door, filled with men from all walks of life who were only too happy to attend meetings in exchange for free booze⁠—or what we would today call, well, a trade association. The Chicago Board of Trade hired a bouncer to keep the freeloaders at bay, but this still left the nascent organization with very little to do. That would soon change.

Before 1848, farmers carted sacks of wheat into the city, behind horses on unpaved roads, and then sold it directly to buyers. When the canal and railroads lowered shipping costs, far more of the golden grain poured into the city, where it was loaded into grain elevators in exchange for a receipt.

With wheat no longer associated with an individual farmer, it became an exchangeable common good, or commodity, with one bushel of a given grade as good as any other. This at last gave the Chicago Board of Trade something to do: It provided an exchange, a place where buyers and sellers could gather in pits and shout out prices at which they were willing to trade.

It didn’t take long for traders to innovate in this new space. In addition to trading wheat already in an elevator, known as physical wheat, they made deals for so-called future wheat not yet in an elevator but expected to arrive at some later date. Such “to-arrive” contracts would eventually take the name used today: futures. Anyone planning to buy or sell future wheat could lock in a price days, weeks, or months in advance. This, of course, required someone to be on the other side of the trade. Sometimes a miller could find a farmer willing to sell, or vice versa, but not always. Enter the plungers.

These fellows had no interest in actually buying or selling grain. They wanted only to profit on price changes, caring not a whit about wheat. They would buy an elevator receipt simply on a hunch that prices would rise, at which time they could sell it at a profit. Or, if the trader foresaw a price decline, he could borrow someone’s receipt, sell it for cash, and later buy it back at a lower price in order to return it to its lender, keeping the difference as a profit. (This is known as shorting a market and is precisely how short selling of stock works today.)

One such plunger was Aymar de Belloy. A French nobleman, scion of one of the oldest and most prominent families in France, Belloy started adulthood with an inheritance of $300,000 ($9 million in today’s dollars)⁠—most of which he immediately proceeded to squander. In 1868, he brought the remnants of his fortune to Chicago to speculate on wheat. He managed to stay afloat long enough to marry and father a number of children, then his luck ran out. And so did the last of his money.

Belloy’s misfortune stemmed from more than bad luck. He was the victim of unscrupulous traders known simply as operators, who might sell fake elevator receipts, or move prices in their favor by spreading false news. Or they might pull off an especially cunning manipulation known as a corner, in which they would buy future wheat while simultaneously buying all physical wheat.

Later, when it came time for the operator to take delivery of his future wheat, the other trader had to first go buy some. But there was none. The operator owned it all. Thus trapped, or cornered, the victim had no choice but to pay whatever price the operator demanded. Cornering was the ruin of many a trader, like our Belloy, to whom the only apparent recourse was to find the nearest saloon and shoot himself in the head.

After an agonizing ride home in a horse-drawn taxi, Belloy’s luck turned in his favor. A doctor pronounced the wound non-life-threatening, assuring Belloy he would be back on his feet in only a week or two. His friends at the Board of Trade took up a collection and raised more than $1,000 for Belloy and his family. Members of the press, having little respect for men who gambled on the price of food, were not so moved. The Chicago Journal ran an editorial on Belloy and his roller-coaster luck. They, too, suggested a collection be taken: to buy him a better gun.

But Belloy’s luck changed again. The doctor was wrong. The wound proved mortal. Two days after shooting himself at Kirchoff’s, the nobleman-turned-derivative-trader died.

The failed plunger left his widow and children penniless. The eldest son went to work as a bootblack on the streets of Chicago, shining shoes, though he himself wore none. Then the boy sold newspapers and scrounged the odd penny however he could. The mother took alms.

The corner practice did more than add to Chicago’s widow and orphan population. It made a mockery of a free market. Farmers might not mind when the price of grain was manipulated upward. They could make more money. But consumers certainly minded. Bakers had to make loaves of bread smaller to keep them priced at a nickel, the most it was believed consumers would pay.

The Board of Trade directors knew something had to be done, so they introduced a new rule:

“…the practice of “corners,” of making contracts for the purchase of a commodity, and then taking measures to render it impossible for the seller to fill his contract, for the purpose of extorting money from him, has been too long tolerated… these transactions are essentially improper and fraudulent.”

The rule could not have been more clear in defining a corner and its ill effects. It went on to proscribe strict penalties for violation and was written into bylaws with haste. And then it was promptly ignored.

New Chicago Board of Trade building, 1885
New Chicago Board of Trade building, 1885

On 28 April 1885, members of the Board of Trade and their wives looked forward to a magnificent banquet to be held that evening in the lobby of their gleaming new building at LaSalle Street and Jackson Boulevard. Nearby, the anarchist Albert R. Parsons raised enthusiasm of another sort, telling a gathering crowd on Market Street that the nearly $2 million spent on the building had been stolen from their own pockets, by members of what he dubbed the Chicago Board of Thieves. He called his audience to arms. “Let every man lay up a part of his wages,” he urged them, “buy a Colt’s navy revolver, a Winchester rifle, and learn to make and use dynamite!”

The mob did as instructed. As day turned to dusk, some 2,000 protesters marched toward the building carrying red and black flags, revolvers, and homemade nitroglycerin bombs. A marching band played the Marseillaise. Just one block away from the brightly lit building, a wall of police officers stopped their advance. Mob leaders shook their fists, yelled more words of outrage to the crowd, then retreated to nearby saloons to safely drink off their rage.

The imposing new Board of Trade building may have looked staid and dignified on the outside, but the view inside was anything but. A popular saying went: “The wheat pit is only twenty yards across, but it goes down to hell.” The writer Frank Norris penned a roman-a-clef titled The Pit about wheat speculation in Chicago. It was not a dry read. He described the trading pit, for instance, as:

“a great whirlpool, a pit of roaring waters spun and thundered, sucking in the life tides of the city, sucking them in as into the mouth of some tremendous cloaca, then vomiting them forth again, spewing them up and out, only to catch them in the return eddy and suck them in afresh.”

The image becomes particularly disturbing upon learning the definition of the word “cloaca”.

The unlucky Belloy was not the only early futures trader whose life ended in an unpleasant fashion. The ruined trader Nelson Van Kirk used his last few dollars to buy a cheap revolver that had to be pried from the fingers of his corpse. The trader T.C. Chisolm lost everything in a failed wheat corner, save an elevator full of corn in New York, which, it turned out, was rotten. He took a ferry to Brooklyn (no doubt noticing a magnificent new bridge still under construction), then found a remote slip where he filled his pockets with stones and plunged into the East River to drown.

Board of Trade in session, 1900
Board of Trade in session, 1900

Deaths such as these became rather routine. In 1905, the veteran CBOT official George F. Stone was asked about the long history of out-of-luck traders resorting to felo de se. He rejected the idea that board members were prone to suicide, and in fact asserted just the opposite:

“The average board of trade man is of other mettle. He is hopeful and looks upon the bright side of things, and in case of disaster his first impulse is to consider that better times will come.”

The Belloy, Chisholm, and Van Kirk widows may have begged to disagree.

The manipulation of securities trading continues to this day, such as by high frequency traders whose practices are seen by some as less than ethical. Michael Lewis details one such practice in his book Flash Boys, where market makers use superior networking technology to change the market price of a security after a customer sees it and places an order, forcing them to trade at an inferior price.

The derivative traders once known as operators remain at work, but trader suicide began, thankfully, to wane in the early years of the twentieth century. Plenty of traders have lost fortunes and many died penniless, but typically not at their own hands. Thus we are unlikely to again see the likes of Aymar de Belloy, whose story does not end with his death.

One month after his funeral, Belloy’s luck turned yet again. News came from France that he had inherited $2 million ($50 million today) following the death of his mother. All that was needed for the widow to receive the money was proof of marriage. This was duly secured and provided to the authorities.

Belloy’s widow took the title of Marchioness, the eldest son the title of Marquis. The family was elevated from dire poverty in Chicago’s tenement district to aristocracy on the Gold Coast.

Life after that was pretty good.

The Reconstruction of Ulysses S. Grant

How the beloved American Civil War general and two-term president failed at every attempt to make money. Except for one… Published by Damn Interesting on April 11, 2017

In the second half of the 19th century, few Americans were better known⁠—and revered⁠—than the man whose face looks out today from the $50 bill. Ulysses S. Grant led Union troops to victory in the American Civil War, then thwarted attempts by President Andrew Johnson to suppress fundamental civil rights of newly freed black Americans. Twice elected president himself, Grant stewarded a war-torn nation as it struggled to reunify. After leaving the White House, he invested his name and entire life savings to a Wall Street brokerage firm. It would make him rich, he was told, and afford him a comfortable retirement. Instead, it would leave him penniless.

Like any army commander, Grant had lost battles and had known the pain of defeat. But this loss hit personally. Never before had he found himself in straits so dire, literally destitute. Fortunately, the former president and retired general had one more fight in him⁠—because his real troubles had just begun.

Hiram Ulysses Grant was born in 1822 to Ohio tannery foreman Jesse Grant and his wife, Hannah. In 1839, Jesse secured a place for his son at West Point, not so much for its esteem as a military academy, but because it was free. On his first day there, the young man found his name listed by mistake as Ulysses Simpson Grant. He had always disliked his given initials⁠—H.U.G.⁠—so he came to rather like his new name with its patriotic abbreviation: U.S. Grant.

In 1843, at the age of 21, Grant began his career as a commissioned officer in Missouri, where he fell in love with his roommate’s sister, Julia Dent. They paused their courtship when Grant was sent to fight in the Mexican-American War, in which the U.S. took by force much of the current southwestern U.S. from its neighbor to the south. Personally, Grant felt opposed to what he saw as an unjustified use of superior military force, but he kept his political views to himself. He served dutifully as a junior officer and admired the qualities of General Zachary Taylor, which would shape his own leadership style in a much more significant war two decades hence.

Ulysses and Julia
Ulysses and Julia

Ulysses and Julia married just months following the end of the Mexican-American war in 1848, a joyous occasion for all but Grant’s parents. Staunch abolitionists, they liked Julia enough, but could not stomach her father, a slave owner and staunch defender of his right to be one. Grant’s parents boycotted the wedding.

Still, the couple’s mutual affection had not wilted in the five years they waited to wed, nor would it ever. To him, she would forever be “dear Julia”, and to her, privately, he was always “Ulys”. However, she would soon discover one small problem: her husband had a remarkable inability to earn a civilian living.

Like many of his peers in the Army, Grant took to moonlighting to bolster his meager military pay. But he failed at everything, in part from trusting everyone he met. He put his money into a venture to sell ice shipped in from the Arctic; it melted en route. Potatoes and onions, planted in anticipation of a certain windfall, rotted in the ground. His partnership in an establishment selling goods to soldiers, known as a sutler’s store, ended when he naively accepted a worthless IOU when his partner wanted out.

Grant began imbibing more than he should, which for him meant just two drinks. That’s all it took to intoxicate the young man to the point of insensibility. He usually resisted having a drink before reporting for duty, but not always. One day, his commander gave the drunken officer an ultimatum: resign or be kicked out. Grant chose to resign.

Broke, the Grants and their two infant children took up residence in a shack in Missouri. He peddled firewood on the streets of St. Louis to support his family, which soon included two more children. He pawned his gold watch to buy Christmas presents. When Julia Grant’s father died, they moved into the Dent family home. They also inherited something else⁠—or rather someone else: a slave named William Jones.

Grant could have ended his financial woes by selling the man for a thousand dollars, or earned even more by renting him out. Instead, he took Jones to the local courthouse and signed manumission papers, setting him free. And then Grant went back to peddling firewood. He would later demur when asked why he did such a thing. Perhaps he was simply his father’s son.

At the outbreak of the Civil War, Grant wanted back in the Army, but the Army wasn’t interested. His reputation as a drunkard preceded him. Eventually they did offer him a unit to lead, one nobody else wanted. The 21st Illinois Artillery was one of the rowdiest, least disciplined, and most troubled units in the Union Army. When Grant took command on 14 June 1861, the restless men were only two weeks from the end of their enlistment. They couldn’t wait to go home. Then they met Grant. At the end of June, nearly every man signed up for another three years. “We knew we had the best commander and the best regiment in the State,” remarked one of them.

Grant turned the unit around by demonstrating a leadership style borrowed from Zachary Taylor in the Mexican-American War, marked by thoughtfulness, decisiveness, simple orders, and⁠—above all⁠—humility. This, his soldiers admired most of all. Grant shunned ostentation, flamboyance, and even a commander’s uniform. He dressed like his men did and looked “plain as an old shoe,” according to one Army doctor.

Grant paid keen attention to detail and remembered everything. He was unafraid of taking risks, learned from his mistakes, and seemed to never tire. And he kept his drinking in check. Instead, he mostly took comfort from cigars. He knew not to be seen drinking, but nobody cared how much he smoked.

Grant, 1868
Grant, 1868

Ulysses S. Grant the failure became Ulysses S. Grant the towering general, regarded to this day as one of the best military leaders of all time. In addition to military prowess, he also became known for making the most of whatever he had. This caught the eye of President Abraham Lincoln, who had grown dismayed with one general after another⁠—Winfield Scott, George McClellan, Henry Halleck⁠—complaining they did not have enough troops, or supplies, or time. Grant just did his job.

Waging war was no easier for Grant than his predecessors, and more than once, it appeared the Confederacy might win the war. But Grant kept his wits about him; he’d listen carefully to every word of advice he was given, then quickly make up his mind and pen an order. He communicated more easily in writing than in speaking, and thus would write long into the night. But he always saved energy for a letter to his Julia. “I have been writing until my fingers are tired and therefore you must excuse haste and a bad pen,” he’d write. “Kiss the children for me. Ulys.”

Thus it was Grant whose smarts and stamina⁠—and hard-won victories at places like Shiloh, Vicksburg, and Richmond⁠—landed him across the desk from General Robert E. Lee at Appomattox Courthouse in April 1865, accepting the Confederacy’s surrender and bringing the Civil War to a close. For Grant and the nation, the feeling of relief, and hope for the future, was beyond description. But it would not last long.

Abraham Lincoln thought the world of Grant. The feeling was mutual. Their wives, however, had mutual feelings of another sort. They did not get along. At times, Grant had to choose between his wife and the president, as when Lincoln invited the Grants out for an evening of leisure just days after Lee’s surrender. Grant’s wife would have none of it. So he manufactured an excuse about having to catch the next train north to visit their son. President and Mrs. Lincoln went out that evening without the Grants, taking a short carriage ride from the White House to Ford’s Theater to watch a play. There, John Wilkes Booth entered their box and assassinated Lincoln.

Grant would never forgive himself for begging off, certain that had he accepted the invitation, his bodyguards stationed outside the door would have stopped Booth. As lieutenant general of the U.S. Army he was entitled to armed protection around the clock. The president in those days was not.

Lincoln’s assassination came just five days after Lee’s surrender. Confederate sympathizers seized the opportunity to roll back many of Lincoln’s efforts to reunite the nation. Unfortunately, one of those sympathizers was his own vice president. Andrew Johnson had once been a senator from Tennessee, and Lincoln did not select him for his vice presidential running mate. He had left that to delegates to the 1864 Republican Convention, who put Johnson on the ticket in an effort to attract war-supporting Democrats. Now, unexpectedly occupying one of the most powerful offices on earth, the new commander in chief set out to influence the post-war national rebuilding effort known as Reconstruction. His top priority? Maintenance of white supremacy.

Grant (center left) depicted next to Lincoln, General Sherman (far left), and Admiral Porter (right)
Grant (center left) depicted next to Lincoln, General Sherman (far left), and Admiral Porter (right)

Grant continued serving as Johnson’s general in chief and, later, secretary of war. He found himself walking a fine line, on one hand obliged to obey orders, but on the other dismayed by Johnson’s disregard for the rights of newly emancipated slaves, or ‘freedmen’. Johnson derided the Fourteenth Amendment, refused to enforce measures of Congressional Reconstruction Acts, and fired General Philip Sheridan for seeing to the registration of thousands of black voters.

Congress fought back. Its members united in using every means at their disposal to protect the nation from a man they saw as an utter threat to the prospect of a reunified country. They liked Grant, who let his opposition to his boss be known. Congress even passed legislation essentially preventing the president from telling his war secretary what to do. Ultimately, on 24 February 1868, the House of Representatives voted for the first time ever to impeach the president of the United States. The Senate failed to eject Johnson from office by a single vote.

Four days later, Republicans met in Chicago to choose a nominee for Johnson’s successor. They nominated only one candidate: Grant. He won the votes of all 650 delegates on the first ballot. In November, he was elected the nation’s 18th president, vowing to realize Lincoln’s vision of a re-United States of America.

Grant is not generally remembered as a great president. By blocking Johnson’s attempt to all but undo the Civil War, however, some might consider him at least a very good one. His central mission was to protect “citizens of every race and color” and to ensure their “peaceful enjoyment of the rights guaranteed to them by the Constitution.” That struggle continued well after his time⁠—indeed, to the time of this writing. But Grant allowed that struggle to at least get underway.

After leaving the White House in 1877, Grant and his family took a long tour, circumnavigating the globe. He was warmly greeted everywhere and treated as a celebrity. It was a refreshing tour, but expensive. He needed work. American presidents in those days were not entitled to a pension, and he had given up his Army pension when he entered the White House.

Grant had made friends with Mark Twain during his travels, who considered him a kindred spirit, both having gone from abject failure to the heights of success. Twain suggested that Grant write his memoirs. Grant demurred. He had no talent for writing, he said.

The Grants settled in New York. Friends bought him a four-story brownstone on East 66th Street, near the Central Park Zoo. His son Buck lived in Manhattan and had invested in a brokerage firm with Ferdinand Ward, a financier who soon convinced the elder Grant to join them. He need only invest $100,000 and his name, and he would have no job responsibilities. Grant agreed.

Before long, both he and his son would invest every dollar they had into the firm of Grant & Ward. Located at 2 Wall Street, at the intersection with Broadway across from Trinity Church, the little firm made a big splash in no time. In less than a year, the value of Grant’s share was estimated at $2.6 million, equivalent to roughly $70 million today.

Mark Twain
Mark Twain

Grant had time on his hands⁠—he truly had no real work to do at the brokerage firm. The editor of Century magazine offered to pay Grant $500 per article if he would write his recollections from the Civil War. Again, he said no. He was not a writer and certainly didn’t need the money. His life of leisure seemed a fitting reward for all he had done. So he visited friends, puffed his ever-present cigar, filling many a room with haze, and put on weight, topping 200 pounds⁠—noticeably robust for someone five feet and eight inches tall.

A rare request from Ferdinand Ward interrupted Grant’s semi-retirement one day. The business faced a temporary cash shortfall of $150,000. Might Grant help? Perhaps invigorated by the chance to actually do some work for the firm, Grant rode his carriage to the home of William Vanderbilt, his friend and heir to the railroad and shipping fortune of Cornelius Vanderbilt, and got the money in no time. “I care very little about Grant & Ward,” said Vanderbilt. “But to accommodate you personally, I will draw my check for the amount you ask.”

Grant took the check home and gave it to Ward, who deposited it immediately into his personal bank account. Not 48 hours later, Grant arrived at 2 Wall Street to a sight he could hardly believe. A mob was amassing. His firm had gone under, taking with it the life savings of an unknown number of victims⁠—including Grant himself. The damage did not stop there. Across the street at the New York Stock Exchange, the market tumbled on the news. Ulysses went home and told Julia, then emptied his pockets of cash. He looked down at $81 on the table. She added $130 more. It was all they had.

Grant & Ward went bankrupt because its liabilities totaled $16.7 million on assets of $67,000. The ex-president had been kept in the dark as to the firm’s business operations. Ward had borrowed money at outrageous interest rates, pledging firm securities as collateral⁠—a practice known as rehypothecation, which was and remains a legal practice. But he would pledge the same security⁠—say a U.S. government bond⁠—over and over again to different lenders. That part was and remains illegal. He also paid off older investors with money from new ones. It would be another four decades before this scheme earned a permanent name, when Charles Ponzi did the same thing with so much publicity that he became eponymous with the technique.

The Grants were wiped out. The ex-president insisted on signing over his house to settle his $150,000 debt to Vanderbilt, who refused to take it. Instead, they reached a compromise whereby Grant would hand over his war medals⁠—indeed, every memento of value⁠—to the Smithsonian Institution. The Grants could remain in their house.

Desperate now for income, Grant contacted the editors at Century, who were still interested in his Civil War recollections. He agreed to write four articles, beginning with his personal account of the Battle of Shiloh, for $500 each. The magazine project turned into a book project, with Grant agreeing to a 10 percent royalty.

Grant was elated. His friend Mark Twain was amazed, but for a very different reason. He thought the magazine was ripping off Grant. A 10 percent royalty, said Twain, is what “they would have offered to any unknown Comanche Indian.” Twain offered to pay Grant 70 percent of book proceeds if he would sign with Webster & Company, Twain’s publishing company. Although Grant had not yet signed a book contract with Century, he felt obliged to honor his as-yet verbal agreement with Century. Twain talked him out of it.

As Grant settled into his writing routine, the words flowed more easily than he expected. But his throat bothered him. Some months earlier, while on a trip to a summer cottage, he had cried out in pain after biting a peach. A doctor found nothing amiss, but the pain not only refused to go away but grew worse. By October, his throat nagged him so much he went to see Dr. John H. Douglas, a specialist in New York. The doctor exuded admiration for Grant, then made a thorough examination and did not like what he saw. Grant may have noticed the concerned expression on his face. “Is it cancer?” asked the general. Probably, answered the doctor. A biopsy confirmed the diagnosis.

Alcohol may have damaged his reputation, but the cigars, it appears, took down Grant’s body with a ferocity he hadn’t experienced since the war. Grant’s throat cells were multiplying aggressively, starving normal cells for nutrients, laying siege. Grant could not win this civil war, one of the most intimate kind. Cancer was all but untreatable in those days. But the general could still battle. “This man fights,” Lincoln had once said of Grant. And so he did now.

Grant put every ounce of strength into writing, determined to leave his wife and family with a source of income when he was gone. He wrote diligently for four hours each morning. In the afternoon, one of his children would read it back or help check his facts. He insisted on getting everything right.

Twain visited whenever he could to read Grant’s drafts and offer encouragement and genuine praise. He remarked that only one writer in a hundred could write copy as clean as Grant’s. Twain was then reading Julius Caesar’s Commentaries and said, “The same high merits distinguished both books⁠—clarity of statement, directness, simplicity, unpretentiousness, manifest truthfulness, fairness and justice toward friend and foe alike, soldierly candor and frankness, and soldierly avoidance of flowery speech.”

Not only could this man fight, he could write, too. He drew upon his keen memory for detail that had served him so well in war in accounts such as that of the lead up to the Battle of Petersburg:

“One of the most anxious periods of my experience during the rebellion was the last few weeks before Petersburg. I felt that the situation of the Confederate army was such that they would try to make an escape at the earliest practicable moment, and I was afraid, every morning, that I would awake from my sleep to hear that Lee had gone.”

Grant writing his memoirs, days before his death
Grant writing his memoirs, days before his death

The work was agonizing, as was the pain, especially from swallowing. When Grant could not sleep, his doctor applied muriate of cocaine to his throat, which brought instant relief. The doctor would turn Grant’s pillow to the cool side and instruct him to turn on his side and bring up his knees, sleeping as a child does.

Grant’s weight dropped from over 200 pounds to 130⁠—what he weighed as a young army commander. Back then, it was a sign of fitness. Now, emaciation. He chilled easily despite a shawl and knit cap. Twice a day, he went to see his doctor, by streetcar in order to save cab fare. He took morphine for the relentless pain. When that stopped working, his doctor gave him shots of brandy⁠—by hypodermic needle.

When not writing his memoirs, Grant found time for correspondence, including a farewell letter to his wife. “There are some matters about which I would like to talk but about which I cannot. The subject would be too painful,” he wrote on a sheet of paper hidden in a coat pocket, to be found after his death. “I bid you a final farewell until we meet in another, and I trust better world.”

Grant structured his memoirs into two volumes. The first he wrote entirely in longhand, in pencil, on blue-lined, yellow paper. As he began the second, he had weakened such that writing by hand took too much energy. At Twain’s suggestion, he hired a stenographer, Noble E. Dawson, the general’s former secretary then working for the U.S. Senate, who came up from Washington, D.C.

Dawson would later describe the experience:

“General Grant dictated very freely and easily. He made very few changes and never hemmed and hawed… As he went on his voice became weaker and weaker, and toward the last, I had to take my seat very close to his, and he whispered his words in my ear while I took them down in shorthand. His last dictation was on the 22nd of June, 1885… After this he would sit with his pad on his knee near me, and would write down his ideas and sometimes doodle. He was very weak, and his hand grew more and more trembling as he neared his death.”

In July 1885, Dawson told Grant’s son Fred that the writing was practically finished. Grant had written and edited the first volume and written the second, which others could edit. “I think we had better tell your father that the book is done,” Dawson advised.

Grant could hardly believe it. He asked that the entire work be read aloud. His children took turns obliging, but he was only strong enough to hear the first volume, by then too weak even to listen. He died a little past eight o’clock in the morning of 23 July 1885.

Grant had written 275,000 words in less than a year⁠—roughly three times the length of a typical novel, which an author might take several years to write. He lived just long enough to feel the relief any writer feels when completing a manuscript, but died before his memoirs were published. Grant would never know if his last venture to provide for his family would be a financial success or yet another failure.

Grant's tomb in Upper Manhattan
Grant’s tomb in Upper Manhattan

On 08 August 1885, Grant’s funeral procession began with the ringing of the bells of Trinity Church, directly across the street from 2 Wall Street. At that instant, a Western Union telegraph operator sent a signal to waiting receivers in towns across the U.S. and into Mexico so that all across North America, bells would ring 63 times, Grant’s age, at 30-second intervals.

The line of mourners marching slowly behind the casket stretched more than seven miles. Julia was too wrought with grief to be among them. In the four-person carriage at the head of the cortège rode Union generals William Tecumseh Sherman and Philip Sheridan, knee-to-knee with Confederate generals Joe Johnston and Simon Bolivar Buckner. It was a reunion once unthinkable. Now, former mortal rivals sat together, such was the universal admiration for Grant.

Four months later, the first printing of The Personal Memoirs of Ulysses S. Grant went on sale. Twain had orchestrated a clever subscription campaign so readers might pre-order one of three different bindings, each at a different price point, to maximize revenue. He suspected an adoring and grieving public was eager both to read Grant’s words and to help his wife. He was right.

Twain presented Julia Grant with a check for $200,000. It was then the largest royalty payment ever made and would be followed by more. In the end, she would receive roughly $450,000, or nearly $12 million in today’s dollars. Julia would pine the rest of her days for her beloved Ulys, but not for money. Ulysses S. Grant proved, at last, he could make money as a civilian, as a writer. His book remains in print to this day.

Foreign Exchange(s)

The long-forgotten story of Harry Dexter White, published by Damn Interesting on December 29, 2016

By the summer of 1944, the Mount Washington Hotel had been mothballed for two years. Nestled deep in the Appalachian mountains, the sprawling resort was once a favorite getaway for wealthy New Englanders. But in the wake of the Great Depression and the second war to end all wars, the end appeared nigh for this silent relic of America’s Gilded Age.

Then the US Treasury department offered its owners a staggering $300,000 if they would host a conference⁠—to start in less than a month. An army of hotel workers and hastily recruited townspeople got to work. On the first of July, 730 delegates from 44 countries checked in and proceeded to conduct one of the most influential economic conferences of all time, carving into history the name of the sylvan outpost where it was held: Bretton Woods.

Known officially as the United Nations Monetary and Financial Conference, the Bretton Woods talks focused primarily on foreign exchange rates (the price of US dollars, say, in British pounds) and other tedious minutia of monetary policy. With the world engulfed in war, few in those days were giving much thought to topics as arcane as these. But some people were giving it quite a lot of thought. One was US Treasury advisor Harry Dexter White, who had been toiling in relative obscurity to forge an exchange rate policy that all nations on earth would agree to. Nothing like this had ever been attempted before.

Now the technocrat from humble roots was about to pull it off, earning recognition and his first official government title: Assistant Secretary to the US Treasury. Harry White would soon experience recognition of another sort, with his name splashed across newspaper headlines⁠—but for reasons having nothing to do with exchange rates, economics, or Bretton Woods.

One of the outcomes of World War 1 was, quite unfortunately, the setting of political and economic conditions that led to World War 2. There were many factors at play, but the isolationist policies of the United States⁠—such as its refusal to join the League of Nations⁠—certainly didn’t help. After the second world war the US would play a far more active political role on the world stage as a key member of the United Nations. Lesser known is how the US propelled itself into the economic center of the post-war world and indeed came to dominate global finance. The man chiefly responsible for this turnabout was a most unlikely fellow.

Harry Dexter White
Harry Dexter White

Harry Dexter White was born in 1892 to Lithuanian immigrants who ran a hardware store in Boston’s tenement district. He followed his father into the nuts and bolts business and quit his first attempt at college, returning to hardware until enlisting in the Army for an uneventful tour of duty in France during World War 1. At the age of thirty, White again strolled into the groves of academia, this time blossoming at Columbia University, then getting hooked on economics at Stanford, and finally earning his Ph.D. and a teaching position at Harvard.

Harry’s academic years were marked by decidedly liberal thinking. In the 1924 presidential race, he pledged his support to the long-shot Progressive Party candidate Robert La Follette, who would run a distant third behind John Davis and victor Calvin Coolidge. His writing conveyed a passion for stabilizing economies, pointing to centralized control of trade as a potential model. Harry even went so far as to learn Russian so he might travel there to study it first hand.

But Harry would ultimately go to Washington instead. Frustrated with academia, he wanted to do more than just teach his big ideas. He wanted to put them into action. As such, he was only too happy to take advantage of an opportunity in 1934 to move to the nation’s capital to advise US Treasury Secretary Henry Morgenthau and, before long, President Franklin Delano Roosevelt.

It was a perfect match. Neither Morgenthau nor FDR had much interest in (nor patience for) the tedium of economics. They needed someone who would work in the shadows doing endless research on arcane topics then put them into plain English. They needed what would later be known as a “wonk.” And Harry was the perfect wonk.

Much of Harry’s research centered on world trade problems brought on by the collapse of the gold standard in World War 1. This policy, whereby countries backed their currency with a fixed amount of gold, had been maintaining international price stability for quite a long time. It was conceived in 1717 by none other than Sir Isaac Newton, known famously (though apocryphally) for discovering gravity after a knock on the noggin from a falling apple. Newton gets little credit for his accomplishments, some quite impressive, as Master of the Royal Mint in London. But when one lays the groundwork for modern physics, these things happen.

With the gold standard, paper currency exists as a proxy for a country’s gold reserves. It can be tempting, however, for a country to print more money than it can back up with gold, say when it is at war. That’s what happened during World War 1. Countries needed urgently to buy armaments and pay their soldiers, and decided to unpeg their currency from gold and print as much money as they needed. As the world would soon learn, this can lead to all sorts of other problems, not the least of which is inflation. With more units of currency chasing the same quantity of stuff, the price of stuff goes up. Sometimes by quite a lot.

A United States gold certificate from 1928
A United States gold certificate from 1928

In the years between the two world wars, the price of currency fluctuated wildly⁠—and not just so a country could pay its bills. A country might launch a currency war to competitively devalue its currency, simply to make its products artificially cheaper. Even the United States fiddled with the price of gold, buying and selling it to artificially manipulate domestic prices, for reasons bordering on whimsical. President Franklin Delano Roosevelt one morning raised the price of gold by twenty-one cents. “It’s a lucky number,” he said from his bed, “because it’s three times seven.”

In September 1939, Adolf Hitler ordered the invasion of Poland. Two days later, Great Britain and France declared war on Germany and the Second World War was underway. During the two years before officially joining the war, the United States provided massive support to Great Britain by way of the Lend Lease Program, in which the Americans essentially rented armaments to the British. It gave Great Britain a fighting chance, and put it into considerable debt, both financial and political, to the United States.

In December 1941, a mere two weeks after Pearl Harbor, US Treasury Secretary Morgenthau directed Harry White to draft a plan for economic stability following the end of the war. It was brashly forward-thinking and gave Harry Dexter White the opportunity of a lifetime. He got right to work.

What came to be known as the “White Plan” called for three things to be in place the moment the war ended: Massive capital to help war-torn countries rebuild, the resumption of international trade, and stable exchange rates. This last objective was vital. To achieve it, Harry White proposed renewal of the gold standard, fixing the value of all currency to the world’s most precious metal. Harry loved the gold standard.

Harry’s proposal was circulated among treasury officials around the world. But it was not the only one. The esteemed British economist and author John Maynard Keynes (pronounced “canes”) wrote a competing proposal. Unlike Harry, Keynes was well known and respected, even by the general public. Keynes also had an opinion of the gold standard. He hated it.

Born into British privilege, as a young boy Keynes suffered a weak constitution but showed preternatural intellect. On at least one occasion, he infused family prayers with math, using algebraic symbols to represent his mother and younger brother. “Let Mother equal x,” he intoned, “and let Geoffrey equal y”. By the age of 26 John Maynard Keynes had already earned a lifetime appointment at King’s College in Cambridge.

Like White, Keynes found his greatest calling in the field of economics. His genius and creative approach to solving the most challenging quantitative problems was compared to that of Albert Einstein. He titled what became perhaps his most influential book The General Theory of Employment, Interest and Money.

In the depths of the greatest war of all time, responsibility for post-war economic stability rested on the shoulders of these two men from starkly different backgrounds. The Keynes proposal centered on the idea of a new global currency. He called his proposed currency bancor, French for “bank gold.” Unlike traditional currency, the bancor was to be exchanged only among central banks. Private transactions would continue to use national currencies, each of which was to be equivalent to a fixed number of bancors. Nations could buy bancors with gold but not redeem them for gold, thus retiring the traditional role of the precious metal. Keynes was in essence proposing a gold standard with gold replaced by the bancor.

White, left, and Keynes, right
White, left, and Keynes, right

The White proposal called for a gold standard based on gold, and gold-convertible currency, just like the old days. Or so it seemed. Keynes was concerned about the meaning of the term “gold-convertible currency.” Might any member currency be convertible? Or only one? Or perhaps bancor?

White dodged the question. He would not answer Keynes, and instead suggested any further clarification be deferred to a conference of representatives from all allied nations. Keynes had no choice but to go along, but did make clear that he would not support any policy whereby only the US dollar was to be convertible to gold. However that is precisely what Harry White had in mind.

In addition to forging an agreement on exchange rates, there was also the matter of how to enforce it. White wanted the US to run a new body, to be named the International Monetary Fund (IMF), to see that nations adhered to what would come to be known as the Bretton Woods system. He allowed that Great Britain could run the much less influential World Bank, then known as the International Bank for Reconstruction and Development, to lend money to developing countries and those recovering from the war. Keynes wanted it the other way around. Compared to the IMF, the World Bank position seemed like a consolation prize.

Although 730 delegates from 44 countries converged on Bretton Woods, most of them could just as well have stayed on the golf course. Many in fact did. The essential negotiations were between the United States and Great Britain. And both sides had good reason for confidence in getting their way.

Great Britain had the celebrity economist John Maynard Keynes as their chief negotiator. They could also simply walk away, should negotiations fail, and the idea of getting nations to agree to any international accord absent Great Britain was all but preposterous. They also had great national pride, stiff upper lips, and a quiet disregard for American intellect. Winston Churchill once summarized British respect for the United States by remarking that “we can always count on the Americans to do the right thing, after they have exhausted all the other possibilities.”

The United States had plenty of negotiating power of their own, even in the midst of a world war. For starters the US was then the largest creditor nation on earth and it held two-thirds of the world’s gold in its reserves (in stark contrast to today, where the US is among the top debtor nations). They also had a massive IOU from the British for the food, oil, and materiel the US furnished in the war effort. And in Harry White they had a chief negotiator willing to use procedural manipulation and outright deception in order to get his way.

The practical objective of the Bretton Woods conference was to get 44 signatures on a document, known as the Joint Statement, containing the terms of a new international agreement. Delegates were organized into committees to hash out nuances of a working draft of the agreement, a draft which so far left unanswered the question of which currency was to be convertible to gold. The draft in fact made no mention of a gold-convertible currency at all, indicating only that the value of member nation currency be “expressed in terms of gold.”

Delegates in a meeting
Delegates in a meeting

Then, just before the meeting of a committee Harry knew Keynes could not attend due to a cleverly-designed scheduling conflict, Harry added the words “gold-convertible currency” to the draft. Great Britain was represented on this committee by delegate Dennis Robertson, who in verbal discussion allowed that, for practical purposes, it was acceptable “to regard the United States dollar as what was intended when we speak of gold convertible exchange.” It was all Harry needed.

When it came time to prepare the final draft of the Joint Statement, the document for signature, Harry directed his staff to finally spell out his intention by replacing “gold” with “gold and U.S. dollars” throughout the 96-page document. Delegates saw this version of the Joint Statement only as they were asked to sign it, some literally as they were checking out of the hotel, with no opportunity to see the change. Keynes would not know what White had done until well after everyone had departed Bretton Woods.

Via questionable machinations, Harry Dexter White had prevailed. And now there was to be just one currency that meant anything to most of the world, the US dollar, convertible to gold at a rate of $35 per ounce. The agreement made at Bretton Woods elevated the US dollar from a national currency to a global one, moved the financial center of the world from London to Washington, and established two governing bodies that influence world economics to this day. But although the US did indeed get what it wanted at the Bretton Woods conference, its intentions would soon be thwarted by a most unexpected turn of events.

At the time of the Bretton Woods conference in 1944, relations between the United States and the Soviet Union were still comparatively good. They were among the allied forces, after all, that would soon defeat Adolf Hitler and bring an end to World War II. But with the breakdown of the Yalta accords in February 1945, those relations went decidedly sour. Thus began the Cold War, suspicions of espionage, and a rabid hunt for spies.

In November 1945, the Federal Bureau of Investigation sent a memo to the White House claiming that seven government officials were providing secret information to Soviet agents. One of those named was Treasury Department rock star and architect of the Bretton Woods conference: Harry Dexter White.

It’s unclear whether or not the memo made it to President Harry Truman, who had ascended to the office upon FDR’s death the year before. In any event, in January 1946, Truman nominated White to be the US executive director at the IMF. This was no surprise given White’s leadership at Bretton Woods. Indeed, Truman planned to later nominate White for the IMF’s top job, managing director, a nomination that would have sailed through but for the next communiqué from the FBI.

Alarmed by news of White’s nomination, FBI director J. Edgar Hoover then prepared a new and detailed memo focusing on the allegations against Harry White. According to Hoover, White was reportedly providing Treasury documents to known Soviet agents. The report claimed to be based on numerous sources but did not provide iron-clad proof of any wrongdoing. Unlike the first memo, this one certainly did make it to the president. Truman didn’t know what to believe. No big fan of Hoover, nor of the overzealous hunt for spies that put the careers of honest people at risk of ruin, he let the nomination stand.

Richard Nixon
Richard Nixon

The president did agree to quietly move White into a position with more limited access to government secrets⁠—just in case⁠—and he made a startling offer: Britain could appoint a head for the IMF after all, and the United States would do the same for the World Bank. The US did not give a reason. The American change of tune was an official diplomatic communiqué along the lines of, “Just kidding about the IMF thing!” The British did not question the turnaround and wasted no time in delivering an official diplomatic response along the lines of, “Sure!”

Harry Dexter White expressed outrage at the allegations of espionage. He had never even heard of the supposed informants ratting him out, he claimed, and was most certainly not a spy for the Soviets. The claims seemed particularly far-fetched considering his accomplishment at Bretton Woods, making the United States arguably the most powerful nation on earth. Would he have tried so hard if his true allegiance was to another country?

In August of 1948, White put on a rousing performance in front of the House Un-American Activities Committee (HUAC), the US Congressional investigative body which would come to be known for flimsy accusations and political grandstanding in its relentless pursuit of Communists. HUAC had not summoned Harry White. Such was his eagerness to clear his name, Harry White had in fact asked for permission to testify. His opening statement of complete denial of the accusations, and of his steady support for all things American, was answered by spirited applause from the audience. Committee members remained stone-faced.

White deflected charges with confidence, facts, and indeed tried to discredit HUAC itself, equating its hearings to unlawful “star chamber proceedings.” When a young Congressman on the committee named Richard Nixon prodded him to admit knowing his chief accusers, Whittaker Chambers and Elizabeth Bentley, he was steadfast. No, he repeated, he could not recollect knowing anyone by those names.

His bravado performance in front of HUAC did not come without a cost. On the train home to New York he suffered terrible chest pains. White’s doctor diagnosed a heart attack. He died the next day. Rumors naturally swirled among his detractors of some sort of take-out by the Soviets, or that his death had been faked, but such hearsay was never substantiated.

The witch hunt for Soviet spies among American government officials and cultural elite continued with inglorious gusto. The scourge known as McCarthyism, named for Senator Joe McCarthy, would ruin numerous careers before being written into American history as one of its darker chapters. But Harry Dexter White’s name would not be among them. He had stood up to the red-baiting and prevailed.

Harry Dexter White swearing the oath
Harry Dexter White swearing the oath

Revolutionary as it was, the Bretton Woods accord would not last all that long. It was not fully operational until 1958. And soon its fatal flaw started to show. While it did insulate global prices from unwise monetary and fiscal policies of member nations, the glaring exception was the United States. The global regime would work only so long as the US exercised impeccable economic discipline at home. This meant the US had to resist the urge to get out of economic binds by printing money.

In the 1960s, other countries began to suspect the US was indeed giving in to such temptation⁠— that it was printing more money than it had gold to back up, owing in no small part to the extraordinary financial cost (not to mention human cost) of the war in Vietnam. This did not sit well with other countries. They were particularly bothered by the fact the United States, to produce more of its currency, need only fire up the printing presses. Any other nation had to actually produce goods.

Not only were these other nations perturbed, they also had to confront the very real risk that their US dollars would one day not be redeemable for gold. So in the 1960s, other countries, led by France, began redeeming US dollars for gold in rather large quantities.

In 1971, with US gold reserves at frighteningly low levels, President Richard Nixon took an axe to the central tenet of the Bretton Woods accord: the convertibility of US dollars to gold. This time, there was no conference in the woods and little or no meaningful consultation with other countries. There was only a unilateral action that came to be known as the Nixon Shock.

From that day forward, the price of most world currency has floated freely⁠—and sometimes wildly⁠—in response to market forces. A number of countries such as Hong Kong and Saudi Arabia kept (and still keep) their currency pegged to the US dollar, backed by nothing more than the full faith and credit of the United States. And some countries such as Panama and Zimbabwe simply use US dollars as their own legal tender.

Nixon’s action was not without consequence. Freed of the Bretton Woods shackles, the US could give up the pretense of having enough gold to back up its currency. The United States dollar was now a fiat currency, from the Latin term for “let it become,” created by decree. Uncle Sam could print all the dollars he wanted, and he wasted no time doing just that.

When money is created out of thin air there is suddenly more of it to allocate to the things it can buy. Prices go up not as a consequence of demand or value but only because there are more dollars to spread around. It is little surprise, then, that inflation went through the roof in the early 1970s. Subjected to pure market forces since 1971, major currencies have also more than once been the target of powerful speculation, when well-heeled traders place enormous bets aimed at artificially lowering the price of currency for their personal gain.

Most nations today are on their own when it comes to monetary and fiscal policy. And the price of gold and US dollars remain to this day free of artificial constraint, moving in response to the ebbs, flows, shocks, and follies of an ever turbulent world economy.

Harry Dexter White never lived to see his Bretton Woods creation put into action, nor of course its demise. It’s a good bet Richard Nixon’s opinion of Bretton Woods was not bolstered by his personal opinion of Harry Dexter White. From his days on HUAC onward, Nixon believed White lied to the committee. He believed White was being quite intentional and clever when he prefixed his denial of having known his accusers Chambers and Bentley with “I have no recollection of…” Nixon believed the architect of Bretton Woods was a Soviet spy.

Whittaker Chambers
Whittaker Chambers

It turns out he was right.

Harry Dexter White was indeed guilty of funneling secrets to the Soviets. He did it for quite a long time. His chief accuser was Whittaker Chambers, an editor for Time magazine and one-time Soviet agent who had renounced Communism and ratted out others, most famously senior US State Department official Alger Hiss. And White was no minor informant. According to Chambers, White’s “role as a Soviet agent was second in importance only to that of Alger Hiss⁠—if, indeed, it was second.”

According to Chambers, Harry White began providing him Treasury documents as early as 1935. White had access to not only the most sensitive Treasury documents, but to confidential documents provided by other departments of the US government. White would also provide the occasional summary of information he thought useful and his opinions on how best to reform the Soviet monetary system.

The evidence against White was extensive. The FBI gathered more than thirteen thousand pages of it⁠—much of it quite solid, including eight pages of notes in handwriting the FBI demonstrated was Harry White’s. Some evidence only came to light in 1995 with the release of transcripts of Soviet intelligence cables. These so-called “Venona transcripts” included revelations of internal discussions by members of the US delegation to the founding conference of the United Nations, revelations made to the Soviets by one of those members, Harry Dexter White.

It’s not clear what motivated White’s espionage. Some say he was out to secretly undermine American policy to help the Soviets, others that his actions were mostly appropriate, but that he occasionally crossed the line. It’s noteworthy too that he began passing information a decade before the US and Soviet became nuclear rivals. But it’s clear he shared confidential information he should not have, and that he knew he’d be in trouble were his actions revealed.

One of the more astonishing revelations in the Venona transcripts concerned White’s role in Japan’s decision to bomb Pearl Harbor. In late 1941 the Soviets wanted badly for the US to enter the war and, through intermediaries, enticed White to recommend to FDR that he deliver an ultimatum to Japanese Emperor Hirohito. The Soviets knew the one thing sure to tick off the Emperor was an ultimatum.

There were of course many factors leading up to Japan’s attack, but there is no dispute that White authored the ultimatum FDR delivered to Japan. The emperor decided promptly upon reading it to proceed with plans to bomb Pearl Harbor on December 7, 1941. As they did with many of their operations, the Soviets gave a nickname to this plan to draw the US into World War II. They named it Operation Snow⁠—as in Snow White.

The Soviets did not compensate White with money⁠—doing so would not be very Communist of them⁠—but with gifts. Delivery of the gifts, however, did not always go according to plan. According to author Benn Steil:

“One day (likely in 1945) a carpenter in Washington received a container of caviar at his house. Then a case of vodka was delivered. Then came an engraved invitation in the mail to attend a social event at the Soviet embassy. The carpenter was dumbfounded. Finally came a telephone call from a Harry Dexter White at the U.S. Treasury. The carpenter was also named Harry White. The Treasury-White had traced his misdirected presents. He proposed that carpenter-White send him half the goods and keep the other half. “I was going to send them all back to him,” the carpenter told a reporter. “But I thought,” after reflecting on his talk with Treasury-White, that “he’s the kind of fellow, that if I send them all back, will still think that I kept half. So I did.”

In 1997 Senator Daniel Patrick Moynihan led a commission that reviewed the Venona cables. Among their conclusions was that “the complicity of Alger Hiss of the State Department seems settled. As does that of Harry Dexter White of the Treasury Department.”

The International Monetary Fund and World Bank remain powerful institutions to this day, though not without fierce critics and growing competition⁠—the Asian Development Bank has dozens of member nations and quite a lot of money at its disposal. From time to time, there are calls for a new Bretton Woods, and perhaps one day there will be a global economic accord that includes the likes of China and India, the latter of which was still a colony of Great Britain in 1944.

If there is one day another conference like Bretton Woods, it’s a safe bet attending nations will read the final text thoroughly before agreeing, and give their representatives at the negotiating table a thorough background check.