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Industrial Civilization as a Pyramid Scheme
- University Press of New England
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96 industrial civilization as a pyramid scheme i f I said to you, “Give me a thousand bucks today, and in forty-five days I’ll give you fifteen hundred bucks,” you’d think I was stupid or crooked or both. That kind of interest rate works out to a phenomenal 2,466 percent per year, and it’s what Carlo Ponzi offered investors in Boston in 1920. If I said to you, “Give me a barrel of oil today, and in a month and a half I’ll give you a barrel and a half back,” I’d be making the same deal— but, thanks to the generous energy return on investment (eROi) of oil back in the 1920s, I could have made good my promise. I could have used the energy in your barrel of oil to help drill a well, which would have returned to me one hundred barrels of oil for every barrel I invested in the effort of extraction. (The eROi of Us oil back then was about 100:1.) Too bad Ponzi wasn’t an oilman. He went to jail for what he did—as have some others, like Bernie Madoff, who imitated his basic business model. Ponzi’s spirit lives on, though, not just in the pyramid schemers who defraud investors but in economists who assure us that infinite economic growth is possible on a finite planet—and that resolution of the problems created by growth can only come from continued exponential expansion of the economy’s extractive base. The pyramided structure of our industrial economy becomes clearer when you use eROi to think about what Ponzi did. Before we turn to that, let’s first review the life and work of this man who lent his name to unsustainable, infinite-growth investment schemes. Ponzi came to Boston from Italy in the early years of the twentieth century, and after a few decades of knocking about at the edges of the law, he figured out a sure-fire way to make money. The International Postal Union (iPU) had been set up to facilitate the exchange of mail between countries and was authorized to print and sell International industrial civilization as pyramid scheme 97 Postal Coupons for use as postage (which it still does, since one country ’s postal system doesn’t accept stamps issued by another’s). In the wake of the First World War, the values of different national currencies were in flux, but exchange rates were fixed and the iPU hadn’t adjusted the various national costs of their coupons to reflect the underlying economic reality. Ponzi noticed that by arbitraging these coupons—buying them where they were cheap (like in Italy) and exchanging them for currency where they were expensive (like in the United States)—he could make a profit. Quite a tidy profit: 400 percent, by his reckoning. Arbitrage isn’t illegal. Many of its practitioners provide a valuable service : their actions tend to equalize the cost of investment and commodities across borders, which promotes efficiency (by equalizing marginal returns and costs, less transaction costs). Ponzi explained his scheme to a few associates and friends, and they gave him some money and received in return promissory notes that said very clearly: in exchange for one thousand dollars, Ponzi would pay 50 percent interest in forty-five days, when the note came due. In theory, the plan could have worked—the changes in exchange rates had created a significant disparity—but it would have been stymied by transaction costs. Though the potential gains were large on a percentage basis, a 400 percent gain on a three-cent stamp doesn’t net a whole lot of money in absolute terms. Still, word of the good deal spread, and Ponzi had eager investors— friends of friends, friends of friends of friends. He wrote his first promissory note in February 1920; within a month he had taken in half a million dollars; by the early summer, he was taking in a quarter of a million dollars a day. Some newspapers celebrated the immigrant’s egalitarian dream of sharing financial wealth more equitably; didn’t bankers get rich by depriving little guys of their fair share of returns? Others— including Charles Barron, founder of the financial journal that bears his name—smelled a rat. To invest with Ponzi you had to ignore warnings that for his company to make good on the claims against it, it would have to be holding 160 million iPcs...