In the 1920’s people were interested in making a quick buck, this made get rich quick schemes more popular than ever before. However most of these scheme actually backfired and a lot of people lost a lot of money. Some of the best examples of this are:

• Pyramid/Ponzi Schemes• The Florida Land Boom • Stock Market Related Schemes

Pyramid Schemes

A pyramid scheme is initiated by an individual or a company that starts recruiting investors with an offer of guaranteed high returns. As the scheme begins, the earliest investors do receive a high rate of return, but these gains are paid for by new recruits and are not a return on any real investment. Essentially robbing Peter to pay Paul. The Main problem with pyramid schemes is that, there just isn’t enough people entering the scheme to pay off the earlier investors. This causes a lot of people to loose a lot of money.

Ponzi’s Famous Scheme

In the 1920’s Charles Ponzi ran a famous pyramid scheme. Charles was an Italian Immigrant. Charles was born in Italy and later immigrated to the U.S. 2 years later Charles was performing research into a buisness venture that would include publishing a magazine. At one point Ponzi had correspondence with an associate in Spain, this associate included an international postal reply coupon for Ponzi’s use.

Ponzi’s Famous Scheme

He was to take it to the post office and exchange it for stamps. The coupon had been bought in Spain for the equivalent of one cent, however he traded it in for six cents worth of stamps. You can see how Ponzi may have hoped to profit from this method. Unfortunately for Ponzi the lengthily timeframes needed to transfer foreign currency at that time ate away at his profits.

Ponzi’s Famous Scheme

Ponzi registered his company at the end of December 1919, and promised investors 50% return on their money within 90 days, in fact he claimed that he could deliver a 50% return within 45 days (equivalent to doubling your money in 90 days.) In the first six months of 1920 thousands of people put money into the scheme, it’s estimated that over 10,000 people paid out in excess of $9.8 Million over an 8 month period.

Ponzi was arrested in August 1920, after an examination of his financial records he was put in jail for 5 years.

The Florida Land Boom After World War 1,

Americans finally had the time and money to travel to Florida and invest in real estate. This caused the population of Florida to rise from 968,470 in 1920 to 1,263,540 just 5 years later. The 20’s was a time when a person’s success was measured by what they owned. At the same time the economy was prospering, this made credit easy to acquire if one had a decent job.

The Florida Land Boom

The Florida Land Boom People who recognized the

economic change wanted to buy land and make money by selling land in Florida were known as land speculators. They bought land at cheap prices and sold it for a large profit. However most people who bought and sold this land had never set foot in the state. Instead they hired young ambitious men and women to stand in the hot sun to show the land to prospective buyers and accept a binder on the sale.

The Florida Land Boom

A binder was a non-refundable down payment on the land that required the buyer to pay off the rest within 30 days. Sometimes these buyers didn’t even have enough money to pay for the land and could only afford the cost of the binder and planned to sell the land before the real land payments were due. An important aspect of this was that were counting on prices to continually rise.

The Florida Land Boom

Unfortunately the land boom didn’t come without its problems. The demand for housing was so high that the cost of rent soared and many Americans that had moved to Florida could no longer afford to live there. They began to write home and tell their families about their problems. News got around and Newspapers began to write stories that advised people to stay away from Florida.

Another problem was that Railroads could not keep up with the demand for building materials. This acted as a brake on many developments. Bring the boom’s momentum to a screeching halt. Once land prices stopped going up there was suddenly thousands of acres of overpriced land without anyone to buy it.

Stock Market Related Schemes The “Roaring Twenties” was fueled by new technologies, such as

the radio and the automobile. Aviation was also becoming widespread, as well. The economy benefited greatly from the new life changing technologies. As the Dow Jones Industrial Average soared, many investors quickly snapped up shares. Stocks were seen as extremely safe by most economists, due to the powerful economic boom. Investors soon purchased stock on margin. Margin is the borrowing of stock for the purpose of getting more leverage. For every dollar invested, a margin user would borrow 9 dollars worth of stock. Because of this leverage, if a stock went up 1%, the investor would make 10%! This also works the other way around, exaggerating even minor losses. If a stock drops too much, a margin holder could lose all of their money and owe their broker money as well.

Stock Market Related Schemes

From 1921 to 1929, the Dow Jones rocketed from 60 to 400! Millionaires were created instantly. Investors mortgaged their homes, and foolishly invested their life savings in hot stocks, such as Ford and RCA. To the average investor, stocks were a sure thing. Few people actually studied the companies they invested in. Thousands of fraudulent companies were formed to take advantage of uninformed investors. Most investors never even thought a crash was possible. To them, the stock market always went up.

Stock Market Related Schemes

By 1929, the Fed raised interest rates several times to cool the overheated stock market. On Thursday, October 24 1929, panic selling occurred as investors realized the stock boom had been over inflated. Margin investors were being decimated as every stock holder tried to liquidate. Millionaire margin investors became bankrupt instantly, as the stock market crashed on October 28th and 29th. To make matters worse, banks had invested their deposits in the stock market. Now that stocks were obliterated, the banks had lost their depositors money. Bank runs started, where people tried to withdraw their savings all at once. Even people who had not invested in shares became broke as $140 billion of depositors money disappeared and 10,000 banks failed. The financial system was in shambles. Many bankrupt speculators who were once extremely wealthy, committed suicide by jumping out of buildings. This had thrown our Nation into the Great Depression