Remember This? Chain letters and pyramid schemes

CityNews, in partnership with the Historical Society of Ottawa, brings you this weekly feature by Director James Powell, highlighting a moment in Ottawa's history.

For many, the lure was irresistible.

For only a small investment, they could make big money. It was a heady prospect, especially for the poor and unemployed. And in the mid-1930s, there were many such people. With the Great Depression still holding a powerful grip over the North American economy, the promise of quick money attracted thousands. All that somebody needed was a dime, some letter paper and envelopes, and the names of five people to give or send them to.

While similar schemes had surfaced from time to time in the past, there was nothing quite like great “Prosperity Club” or “Send-a-Dime” chain letter of the spring of 1935. Some claim that the scheme was started by a woman in Denver, Colorado, but we don’t know for sure. Regardless, it quickly spread across the United States, Canada, and even leaped across the Atlantic to Britain where it was called the Sixpenny Prosperity League.

Almost overnight, there were thousands of participants. Post offices were inundated with chain letters leading to postal backlogs and overtaxed postal workers who had to sort and deliver them. Early participants in the scheme made money, with news of their good fortune attracting more players into the Prosperity Club. But for most, the glitter turned out to be fool’s gold.

The concept was simple. Letter recipients were asked to send a dime to the person named on the top of a list of names contained in the letter, cross that name out, and put their name at the bottom of the list. Then, the person was to make five copies of the letter and send them to five other people. If this happened five times, the name of the recipient would reach the top of the list and would reap the reward of 15,625 dimes, or $1,562.50 if the chain remained unbroken on the next iteration. It was almost magical. The problem was that it was unsustainable. After only a relatively few iterations, the entire population of the world would have to participate to keep the chain alive. The Prosperity Club was a classic pyramid scheme.

This fact did not deter people. Most were mathematically illiterate or didn’t stopped to think about the odds. And many of who figured out that the chain would be quickly broken thought it was worth ten cents for a chance at making a small fortune. Those who joined early and whose names appeared near the top of the list stood to make significant money.

The Prosperity Club letter was quickly duplicated by other chain letters. Churches got into the act. One enterprising pastor in Kansas City claimed that St. Paul wrote the first chain letter—his epistle to the Galatians. He said his church’s revenues went up 75 per cent as a result of a “go-to-church” chain letter. Another pastor in Texas organized chain letters for every age group to raise money for his church in amounts starting as low as one cent so that all could benefit from the chain letters’ bounty.

Even Hollywood got a piece of the action. Out in 1935 was the movie Make a Million, staring George Sharrett, Pauline Brooks and George E. Stone. It was the story of a million-dollar chain letter started by a college professor. It was also an attack on the economic system that led to the Great Depression. The film showed at the Imperial Theatre in Ottawa that October.

U.S. and Canadian post offices officials were not amused by the chain-letter fad, and quickly tried to put a break on such quick-money schemes. Operating in a legal grey zone in Canada, the Canadian post office said that chain letters were a “racket” and directed such letters, if they could be identified, to the dead letter branch.

While most participants were innocent players, some chains were started by the unscrupulous who sent out thousands of letters with their names at the top of the lists. When trusting people send them their dimes, the initiators of the chains stood to gain hundreds of dollars.

When Ottawa Mayor Nowlan received a chain letter that had assured him of the receipt of $1,562.50 if he sent his dime and copied the letter to five friends, he declined the opportunity and broke the chain. He also ordered a stack of similar letters addressed to city aldermen which had been left with the elevator man to be destroyed.  

One winner of the chain letter fad in Ottawa that spring was a young delivery boy who had been arrested for riding a motorcycle without a licence. Pleading guilty, but unwilling to either pay the $12 fine and court costs or go to jail, he asked the judge to delay his sentence a week. His request granted, the boy organized a chain letter in the meantime and “earned” enough money to pay his fine when next he appeared in court.

On Saturday, 22 June 1935, a new get-rich-quick opportunity took Ottawa by storm. It was the $1 for $10 scheme. That morning, an upstairs office at 193 Sparks Street opened for business, taking the names and dollar bills of investors. The scheme promised a payout of $10 to “investors.” Every time twelve new names were added to the list, the broker paid out $10 to the person whose name was at the top of the list, keeping $2. Unabashedly a pyramid scheme, payouts depended on new investors joining the scheme.

Business was brisk, so brisk that the elevator man said he would need a holiday after all this was over. Some players, unwilling to wait for the elevator, preferred to run up the three flights of stairs to get their names on the list as quickly as possible.

When a Citizen reporter went to the office at 11:00am that morning to see first hand what was happening, he saw frenzied investors lining up to put down their dollar bills to get their name on the list. He also claimed to have seen dozens of investors paid $10. Some reinvested their winnings. He described the office as resembling a “telegraph boys’ headquarters.” Telephones jangled, with dozens of messenger boys running in and out for those who were unable to get to the office in person.

Under a banner head line on the following Monday, the journalist reported “Ponzi was a piker!” The jailed Boston financier and fraudster had only promised a 50 per cent return in 45 days—“small pickin’s” compared to the 900 per cent offered by the Ottawa scheme. (Ponzi paid the abnormally high rate of return guaranteed to investors by using the incoming funds of new investors.) The article noted, however, that if somebody was in tenth position on the list,120 new investors would have to join before they received a payout. At the fiftieth position, 600 new names would have to be added to the list.

To meet the demand, additional offices quickly popped up on Rideau Street in the Transportation Building, and on Bridge Street in Hull. This was followed by a curbside office at the corner of Cooper and Bank Streets. Two young men with a sign posted above them on a telephone pole, took in money from would-be punters until the police moved them on for blocking traffic. A third Ottawa outlet opened in the Ritz Hotel at the corner of Bank and Somerset Streets. When a reporter visited that office, two harried clerks, with their shirt sleeves rolled up, sat on a bed gathering up bills into rolls of various denominations. So busy were they taking in the money, there were reportedly having difficulty in paying out, their accounting system on the verge of collapse. They later called the hotel manager for a bigger room.

Besides the $1 for $10 list, the offices also offered alternatives for the would-be investor. For the faint of heart or those of lesser means, you could put your name onto the 50-cent list which offered a return of $2.50 as soon as six more people joined up. For those wanting to take a more significant plunge, there was a $10 list that returned $100 after twelve other gamblers joined. This list was apparently the least popular—no big surprise since that was the equivalent to roughly $200 today.

Although the police pursued a “hands off” policy for the time being, the head of the police morality squad toured the local “investment offices” to collect information on how they operated. Meanwhile, Crown Counsel J.A. Ritchie consulted a mathematician. Ritchie is reported as saying “I think it could be demonstrated that as the list grows it would take more than the entire population of the Dominion to pay off some of those on the list.” But without guidance from the authorities and a lack of complaints from the public, the police stayed their hand. As the law waited for the green light to close the offices, business boomed as a steady stream of both men and women eagerly signed the lists and parted with their hard-earned dollar bills.

Other enterprising Ottawa businesses joined the game. A number of Lower Town grocery stores began giving $1.00 grocery vouchers to every fifth person who paid 25 cents to place their name on a grocery list. Reportedly, housewives flocked to the stores once word got around. An Ottawa hotel set up a similar beer racket with the pay-off being 27 bottles of beer. This one quickly caught the attention of liquor licensing officials.

With the law vague on the legality of chain letters, Crown Counsel Ritchie urged the federal government to amend the Criminal Code to outlaw such schemes. Very quickly, the government leader in the Senate, Arthur Meighen, moved an amendment to the Code saying that it was “an attempt to define and prohibit the new so-called chain letter scheme of getting rich quickly.” In the dying hours of the 17^th Parliament of R.B. Bennett in early July 1935, both the Senate and House of Commons approved an anti-chain letter amendment to the Code with little or no discussion.

Here in Ottawa, after raking in thousands of dollars, the so-called investment offices were closed. By this point, however, business had already begun to slow, the market saturated. Of course, those on the bottom of the list who still waiting for their pay-outs were out of luck. Their money was gone. The newspapers did not report the size of their losses.

In modern times, pyramid investment and marketing schemes have remained a thorn in the side of investors and regulators. The biggest of all time was the New York-based Bernard L. Madoff Investment Securities ran by the now deceased Bernie Madoff. The business, with accounts totalling US$65 billion, went spectacularly bust in 2008. Madoff’s company, which had operated for many years, was a giant fraud. Like Ponzi, Madoff hoped that investors, lured by the promise of high returns, would roll over their investments instead of redeeming them. The minority who took money out were paid off by inflows provided by new investors. Meanwhile, Madoff skimmed off millions.

This went on for years until people realized what Madoff was doing and that their financial statements were fictitious. Even those who had bailed out early lost money in the end as liquidators of Madoff’s firm clawed back their fraudulently-earned profits which were then shared out among the losers. Bernie Madoff died in April 2021 while serving a 150-year prison sentence.

Despite Madoff’s notoriety, people continue to fall pray to pyramid schemes and similar frauds. In 2020, an Ontario man was arrested in a $56 million Ponzi scheme under which he allegedly promised high returns to investors for investing in a company selling debit card machines.

Morale of this story: be wary of any investment or marketing scheme that looks too good to be true. It probably is.