An almost-forgotten incident in American economic history was the pyramid scheme that swept Southern California during the stagflation of May 1980. Yet, now that we know that about 2/3rds of the Housing Bubble of 2000-2007 took place just in California, it’s worth reviewing incidents from California’s long history of financial manias.
I missed out on the late May 1980 climax of LA’s Pyramid Fever because I got back to LA on May 16, 1980 after graduating from Rice, then left on May 20 for Europe. I recall reading about the early days in the local newspaper with amazement.
When I got home a couple of months later, nobody ever spoke of it again.
The difference between a pyramid scheme and a Ponzi scheme is mostly that the machinations of the pyramid scheme are out in the open. Time Magazine’s June 16, 1980 issue describes the mechanics of the Great LA pyramid scheme:
For $1,000 each, 32 newcomers buy slots on the bottom row of a pyramid-shaped roster. Each new player pays half of his $1,000 to the person at the pinnacle, who ends up with $16,000. The new player also pays his remaining $500 to the person directly above him on the next tier, which contains 16 people. Since each person on that tier gets paid by two of the newcomers, he ends up with $1,000, thus recouping his original investment. As more people buy in, the players move up the chart. In time, theoretically, each person reaches the top—and $16,000.
The scheme caught on as only a California hustle can. Pawnshops did a booming business, as players hocked stereos to raise the initial fee. Most players, however, were middle-class suburbanites out to fight inflation. Everyone seemed to know someone who had indeed won $16,000. There were runs on local banks for $50 and $100 bills to be used in the night’s gaming. Dentists reported patients, even with mouths full of cotton, soliciting them to join the club. Games were held in unlikely hideaways, including Hollywood sound studios, chartered buses and the Grand Salon of the Queen Mary at anchorage in Long Beach.
The wild thing about this 1980 outburst was that it was the most blatant pyramid scheme imaginable, combining the usual pyramid scheme mechanics with a New Age cult of the Power of the Pyramid.
Back in Gov. Jerry Brown’s California, “pyramid power” was a popular New Age concept. (Although there’s never anything new about New Age in California — the lovely coastal mountain village of Ojai has been a New Age center since the 1800s.) In 1977 I went to a fashionable Westwood hair styling salon where for a few bucks extra you could get your hair cut in a special chair under a pyramid dangling from the ceiling. The pyramidal aura was supposed to help you avoid Bad Hair Days or something. (I declined. But, now that I think about it, I did have a lot of BHDs …)
In May 1980, a vast multi-level cash exchange craze developed in California that explicitly invoked the mystique of pyramids. Every night there were hundreds of house parties hosted by people who had gotten in earlier on this multi-level scam (perhaps the night before). My vague recollection from newspaper reports is that you’d go over to a higher-up’s house and sit with him under his pyramid while you gave him cash in return for your very own kit for building a pyramid out of wire and fabric. The Ancient Egyptian emanations from his pyramid would ensure that you’d get even more cash back from the suckers you’d recruit to buy your pyramid kits from you while sitting under your pyramid.
Perhaps I don’t have the details right, but pyramid imagery was central to the experience, which made this Pyramid Power pyramid scheme hard to debunk. It was already pre-debunked. Anti-fraud authorities would go on the local TV news to denounce the pyramid schemes as “pyramid schemes,” which just served as good advertising. “Well, duh, of course it’s a pyramid scheme,” participants would laugh. “How do you think those Egyptian pharaohs got so rich that they could afford those giant pyramids? Through tapping the secret energy of Pyramid Power!”
Here are summaries of articles from the Los Angeles Herald Examiner from May 21 to June 1, 1980:
“Get-rich-quick ‘chains’ multiplying too fast to stop.” May 21, p. A3.
[California pyramid schemes. Participants a “cross-section”. Los Angeles: hundreds of calls a day asking about legality; at least 100 clubs (c. 30 persons each). Parties busted. Alameda County High school pyramid: ounce of marijuana to buy in, pay-off a pound.
“Pyramids: ‘Brother can you spare a dime,’ 1980-style.” May 22, p. A1+.
About 40,000 attend “pyramid parties” in Los Angeles last night (est. 150 to 400 parties). Accounts of arrests. Most common ante $1000, win $16,000. Studio employee: “Studio people are talking about nothing else.” … Some brought to meetings blindfolded. “I never saw anything like it in all my experience as a bunco detective, completely beyond the scope of my imagination.” P. A15: “A pyramid winner tells how she won her money.” Elizabeth Kyger, free-lance writer, 24, tells of splitting $16,000. “I’ve made great business contacts because of this.” Says Ventura freeway westbound jammed in evenings because of pyramid parties.
“Mood of pyramid participants turning ugly.” May 24, p. A5.
Two accounts of anger at Burbank pyramid party site. Out-of-towners now predominate. State Attorney General’s office investigating possible links to organized crime. P. A1+ “Ante goes up to $5,000” Celebrity attendants to day-time pyramid party attempt to deceive or intimidate reporter upon leaving. Photo (p. 1): Policeman holds up “Pyramid Power” T-shirt confiscated in a raid. Letter “A” of “PYRAMID” forms pyramid
“500 rally at Griffith Park to promote money scheme.” May 27, p. 1+.
Sign at rally: “Business Concept Power Happening.” Attendants defend scheme, claim winnings, exchange pyramid gossip (meeting with 237 buys, a $100,000 ante game).
Ventura county brings felony conspiracy charges. Lawyers address crowd – urge no guilty pleas. Petition circulated to DA. Citizen’s Individual Rights and Collective Legal Expression (CIRCLE) distributes fliers criticizing police and media. Photo: Bearded man in pyramid power T-shirt, $ sign between the two words.
“I really feel like a sucker.” June 1, p. 1.
Young printer’s account of collapse of pyramid. Printed 300 pyramid charts. Went in with 3 others at $250 each. Meeting at 8 PM sharp, door locked, a letter was read asking law enforcement and tax collection personnel to admit role. Another person explains pyramid and asks for buy-ins. Last meeting: only people who had lost were present, talk of violence.