What you need to understand about Charles Ponzi's scheme is that when he started it, it wasn't a Ponzi scheme. It all just, well, it sort of got out of hand.

There's no denying that Ponzi was a crook. He'd been fired from his first job in America for short-changing the customers, he'd been jailed in Montreal for forging cheques and he'd gone back to prison in America almost immediately, this time for an illegal immigration scam. But in 1918 he came to Boston, married a nice Italian girl and tried to go straight. And that's when all the trouble started.

You see, Ponzi realised that there was good business to be done selling postal reply coupons. These coupons went for four times as much money in America as they did in Italy. So Ponzi sent off to a friend in the old country, and got him to send over a big batch of the coupons. And then he sold them for a profit.

Pretty soon he was attracting attention, and investors. He paid off the first few with real profits. But then the flaw in his plan became clear. The market for coupons - indeed the total number of coupons in circulation - simply wasn't large enough. As described in Joel Levy's invaluable little book The Con Artist Handbook, by July 1920 he was taking in £175,000 a day. To make a profit for all those investors there would have to be 160 million coupons in circulation. In reality there were just 30,000.

So what did Ponzi do? He started paying off existing investors with the money from new investors, something that requires an endless, growing supply of new investors. It couldn't last. And it didn't. Ponzi's scheme collapsed and in August 1920 he was indicted on 86 counts of fraud. He went to jail, of course. But, strangely enough, he still had a large number of fans who were outraged by his imprisonment and subsequent deportation to Brazil. In the Italian immigrant community he was, for some, still a hero.

The size, the sheer audacity, of Ponzi's fraud meant that his name became attached to the swindle. But his wasn't the first scheme of its kind - the whole thing had been tried, for example, just 20 years earlier by a book-keeper for a tea company known as William “520 per cent” Miller. And Miller had himself been uncovered by a savvy political fixer called T. Edward Schlesinger who said he knew what the book-keeper was up to, because he'd been doing it too. He got Miller to give him $240,000 to get the police off his back, then scarpered to Germany with the proceeds to live a comfortable life on the golf courses of Europe.

Which is a long way of telling you some of the things you need to know about the antics of which Bernard Madoff has been accused.

First, these kind of con jobs are nothing new; they've always gone on and they always will. Second, the conman is part knowing crook and part unwitting dupe. On the surface he is serene, authoritative, charming. At the same time he is increasingly helpless, sped along swiftly, arms flailing, on the current of their own fraud. And finally, the relationship between swindler and swindled, between the con artist and his mark, is complicated.

The common assumption about victims of confidence tricks is that they must be stupid. Not at all. In fact the bigger the con, the more essential it is that they not be stupid. A big con relies on a sophisticated mark who can see the advantage to them of the scheme. A common feature of confidence tricks is that the mark is, at the very least, keen on money. They are ready to cut corners and deal with others who cut corners. But to understand why this is worthwhile, or at least why it is theoretically worthwhile, they have to be bright.

In his classic book on confidence tricks, The Big Con, David Maurer writes: “It should not be assumed that the victims of confidence games are all blockheads. Very much to the contrary, the higher a mark's intelligence, the quicker he sees through the deal directly to his own advantage.” Carole Caplin's boyfriend, the conman Peter Foster, quickly realised that Cherie Blair was the perfect mark.

In other words, the conman finds it easy to explain to bright people how they might benefit. Maurer thinks that it would be too much to expect them also to realise that the whole situation may be a set-up. After all, great care has usually been taken with preparation. As it was with Madoff.

The key moment in the criminal career of Frank Abagnale - the conman played by Leonardo DiCaprio in Catch Me if You Can - came when he saw the way a Pan Am pilot in uniform was treated. He obtained a uniform and a fake ID card and set to work. It proved much easier to get money, girls, food, free flights when wearing a uniform. Want to know how Madoff managed to ply his trade without being properly questioned? Want to know why the regulators didn't bring him to book? He was dressed in the city equivalent of a pilot's uniform. The authority of his big company and his intimidating reputation clothed him.

But it was the maths that undid him. He chose the wrong con. Ponzi schemes collapse. It is almost mathematically impossible for them to keep going for ever. They are, incidentally, a particular feature of rising markets and come unstuck in downturns. Not all cons come unstuck like this. The mark doesn't like to be thought an idiot or greedy or a crook. So they often keep quiet or even side with the con artist. Even Ponzi himself kept some of his fans. I bet Madoff does too.

Before anyone is too censorious about the victims of this latest scam, consider this. The picture of Nicola Horlick accompanied many of the first Madoff stories. It was coupled with some words she doubtless now regrets. Last summer she said of Madoff: “He is very, very good at calling the US equity market. This guy has managed to return 1 per cent to 1.2 per cent per month, year after year after year.”

Ridiculous, no? How could anyone believe that such returns would go on year after year?

Well, anyone could really. You could, for instance. Or I could.

For the past ten years we have believed that the growth in our economy was magical, that it would go on for ever. It was different this time, we told ourselves, as Gordon Brown told you, me and Nicola Horlick that he had abolished boom and bust.

So we went merrily on our way, funding our public services by getting new entrants to the workforce to pay out benefits to existing members. A Ponzi scheme. And we're the mark.

daniel.finkelstein@thetimes.co.uk

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