Pyramid Scheme

A “financial pyramid” is one where there are many people/investors at the bottom of the pyramid, but few at the top. A “pyramid scheme” pays off the oldest investors by getting fresh money from many more new investors. The term “financial pyramid” has been cited in print since at least 1905.
 
The term “pyramid scheme” has been cited in print since at least January 1949, taking its name from the “Pyramid Friendship Clubs” that began in California and quickly spread throughout the United States. Pyramid schemes are illegal in all states.
 
A pyramid scheme is also frequently called a Ponzi scheme.
 
   
Wikipedia: Pyramid scheme
A pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public. Pyramid schemes are a form of fraud.
 
Pyramid schemes are illegal in many countries including Albania, Australia, Brazil, Bulgaria, Canada, China, Colombia, Denmark, the Dominican Republic, Estonia, France, Germany, Hungary, Iceland, Iran, Italy, Japan, Mexico, Nepal, The Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Romania, South Africa, Spain, Sri Lanka, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, and the United States.
 
These types of schemes have existed for at least a century, some with variations to hide their true nature, and many people believe that multilevel marketing is also a pyramid scheme.
 
Free Merriam-Webster Dictionary
pyramid scheme noun
Definition of PYRAMID SCHEME
: a usually illegal operation in which participants pay to join and profit mainly from payments made by subsequent participants
First Known Use of PYRAMID SCHEME
1975
 
(Oxford English Dictionary)
pyramid, n.
orig. U.S. An (often illicit) form of investment scheme in which a paying participant recruits two or more further participants, returns being given to early participants using money contributed by later ones. Also more generally: any similar scheme in which later participants support earlier ones. See also pyramid scheme n. at Compounds 2, pyramid selling n. Cf. Ponzi scheme n.
[1905 in P. S. Reinsch Readings Amer. Fed. Govt. (1909) 392   A New York concern‥had a scheme for selling fountain pens for $2.50 each, and employing at $8 a week in advertising letter-writing everybody who bought a pen. It was an endless-chain scheme‥. This inverted financial pyramid was not thought stable.]
1920 Oakland (Calif.) Tribune 15 Aug. b4/2   He [sc. Charles Ponzi] paid fifty per cent dividends to first investors from the receipts of later ones. Those at the bottom of the pyramid will get what the receivers in bankruptcy can find.
1949 Washington Post 22 Mar. 1/6   All night long people would call me up to ask how the pyramids work.
 
pyramid scheme n. orig. U.S.
1949 Oakland (Calif.) Tribune 6 Feb. 10 a/1   Pyramid scheme held mathematical monster‥. 25,159,680 persons would have to contribute their money to insure that the original 24 persons in the bottom line‥would collect their $2048.
1968 Los Angeles Times 31 July d15   [A new bill] outlaws ‘endless chain’ or pyramid schemes.
 
18 January 1949, La Crosse (WI) Tribune, pg. 3, cols. 1-2:
Police Try Breaking “Pyramid”
Get-Rich-Quick Plan In West
LOS ANGELES—(AP)—Law officers made valient efforts Tuesday to protect Los Angeles area residents from themselves amid a mushrooming new get-rich-quick fad.
 
Two persons were arrested and fined $100 each for violating the city chain letter ordinance in the new “Pyramid Friendship Clubs” which have attracted thousands of members dreaming of payoffs of $2,000 to $4,000.
(...)
A Pyramid club applicant pays an entrance fee of 50 cents, $1 or $2. He gets two other applicants. Names in batches of 15 are arranged chronologically and in pyramid form, five names to the base. When more names are added to the top one goes to a master list of nine above the pyramid.
 
Members meet weekly at someone’s house. The pyramid grows higher, the top man gets paid off, provided no one has petered out on the deal. Everybody moves up a notch and this goes on and on.
 
20 January 1949, La Crosse (WI) Tribune, pg. 3, col. 2:
Start Pyramid Scheme
LOS ANGELES—(A)—Authorities, convinced the Pyramid Friendship club fund is petering out in the lower payoff brackets, Thursday checked rumors of groups shelling out for king-sized takes.
 
A report that Hollywood had gone in for $50-a-head “pyramids” with a $100,000 payoff mushroomed into a rumor that in the Spring street financial district somebody had started a $100 scheme with an even more astronomical “take.”
   
18 February 1949, Dallas (TX) Morning News, “Thinking Out Loud” by Lynn Landrum, sec. 2, pg. 3:
The column has hitherto discussed the legality of the pyramid scheme and some of its social implications.
 
Time magazine
MANNERS & MORALS: Friendship & a Fast Buck
Monday, Feb. 28, 1949
(...)
Twelve Nights in a Club. The Pyramid Friendship Club game had swept east to Detroit from Southern California. The clubs operate like chain letters, but with one notable exception—to avoid using the mails, members meet and exchange money at nightly parties.
 
The pyramids work like this: at his first party a new member hands over two dollars, becomes one of many “number 125” at the base of the pyramid. The next night he becomes a “number 11” and must bring two new members, each with two dollars, to keep the organization intact. On each subsequent night, as new members multiply and form pyramids behind them, he is pushed toward the peak of his pyramid, until on the 12th night he becomes a number i and theoretically receives $4,096.
 
Time magazine
MANNERS & MORALS: Americana, Mar. 14, 1949
Monday, Mar. 14, 1949
The Pyramid Friendship Club craze reached the Eastern Seaboard. New Yorkers added their own characteristic stamp: increasing the ante from $1 to $5 and guaranteeing to pay off $10,240. There were also wild rumors of a $100 Wall Street club, which was supposed to give the lucky winner a cool $204,800.
 
22 March 1949, Springfield (MA) Union, pg. 6:
Bricklayer Indicted
On Lottery Charge
In Pyramid Scheme
Washington, March 31 (AP)—Daniel A. Thomas, 28-year-old bricklayer, was indicted today on a lottery charge in connection with a Pyramid Club here.
(...)
Brought into such a club, a candidate attends a party paying a dollar. The money goes to the person then at the top of the “pyramid.” He goes to a second party, held by his sponsor, and takes two new candidates he has dug up, each paying a dollar.
 
Google Books
You Can’t Win;
Facts and fallacies about gambling
By Ernest Evred Blanche
Washington, DC: Public Affairs Press
1949
Pg. 133:
Taking its cue from this action, the Bureau of Internal Revenue announced that it would check the income tax returns of those who were successful in pyramid schemes and that it would prosecute those who did not list such income.