The arrest of financier Bernard Madoff on suspicion of running a $50bn fraud offering to pay a steady if suspicious 12% return on investments in good and bad times has had everyone nodding their heads wisely saying, ‘Oh, yes, a Ponzi scheme’. But how many know who Ponzi was or what he did?

In fact the scheme – basically, robbing Peter to pay Paul – had been in operation long before Charles Ponzi (pictured). American William Miller gets the official credit, if that is the right word, and lawyer Robert Ammon was right there with him, laundering, in what is generally thought to the first modern version of scheme. Now, as then, it is all about greed – the greed of the unfortunate investors who think they are getting more than other people, but end up losing their savings for what amounts to a couple of packets of cigarettes a week.

Miller, born in 1874, was the man with the idea. First, he developed a credit rating by repaying his debts and then he set himself up as an investment adviser in Brooklyn, New York. He was also helped by the fact he taught a bible class and persuaded his flock that he could obtain a 10% return on their investments. When they incredulously replied that this was four times what banks paid, he announced that he was offering 10% a week, or 520% a year.

He set up the Franklin Syndicate, trading on the name of the former president, and the first investors were repaid their interest promptly. Now money poured in to the extent that he was making around $430,000 a month. There were, however, hiccups. First he was obliged to pay protection money to one Edward Schlesinger. Then, when it was clear the scheme was running out of steam, he gave what he said was his entire remaining capital of $240,000 to lawyer Ammon and, on the understanding Ammon would send him regular payments, fled to Canada. The lawyer never sent him the payments. Miller was retrieved in February 1900 and, in June, sentenced to 10 years. The term was reduced when, in 1907, he gave evidence against Ammon, who was also charged with fraud. Miller disappeared shortly afterwards with, it was suspected, money he had held back from Ammon.

Charles PonziCharles Ponzi, who sailed to the US from Italy at the end of the 19th century, discovered he could buy international postal reply coupons in some countries at below face value. These could then be resold in the US at a profit of up to 50%. His first venture netted him $1,250.

Now, based on this scheme, he offered investors a 50% return on their money, payable in three months (later cut to 45 days). Once he started paying the interest, more money poured in to his offices. He bought land and a brokerage company, as well as 200 suits, 24 diamond stick pins, 48 gold-handled Malacca canes and a lifestyle to go with them. Then, in 1920 the Boston Post printed an article that Ponzi had served time for cheque fraud in Canada and also for smuggling immigrants. The rot set in, particularly when it was shown there were not enough international reply coupons in the world to back his scheme. The default was reckoned to be $5m-$10m, but it could have been more.

Ponzi was sentenced to five years and then a further conviction followed in Massachusetts. While on bail he absconded to Florida and began a land swindle. It was then on to Texas before he was sent back to Massachusetts. After he had served that seven-to-nine-year sentence he was deported to Italy, where he is thought to have swindled the government. He made his way to Brazil where he worked for an airline, ran a hot dog stall and, before his death in a charity ward in Rio de Janeiro in January 1949, taught English and French.

From then on the scam became known as the Ponzi swindle and over the years it has turned up on a regular basis in one form or another. One in Portugal, paying a relatively modest 10%, was run by Maria Branca dos Santos for nearly 14 years from 1970. She received 10 years in 1988. In September 2003 Reed Eliot Slatkin, an ordained minister of the Church of Scientology in the US, was sentenced to 14 years following a Ponzi, which had taken upwards of $200m, said to be the largest since the ones run by the great man himself. Now even his work has been consigned to the peanut heap by Madoff.

I don’t suppose anyone will thank me for mentioning it and, of course, it was done with the best rather than the worst of intentions but, until the crash, the housing market of the last 15 years – possibly the whole economy – has really been a form of Ponzi. One thing, however, is certain: someone, somewhere is at this very minute working out the details of yet another scheme. But just as the Derby could have been known as the Bunbury if a coin tossed to decide the name of the Epsom Classic had fallen the other way, William Miller, were he alive, would be breathing a sigh of relief that Charles Ponzi did so much better at the swindle than he – or Madoff might instead have been accused of running a Miller.

James Morton is a former criminal law specialist solicitor and now a freelance journalist