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15C R E D I T S U I S S E
Bulletin
Let’s Just Talk …
Credit Suisse Invest – The New Investment Advisory ServiceWith our investment advice you can get involved, when you want to, and discuss directly with globally connected experts. You will benefit from a variety of carefully selected investment proposals. All of this with low transaction fees.
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LY, VIETNAM, VND – 10,000 Vietnamese dong is commonly referred to as a glass. This is due to the country’s way of drinking: The restaurants store rice wine in large containers from which the order – a “ly” (glass) or a “chai” (bottle) – is drawn, at a fixed price. The Vietnamese dong (“copper” in English, as coins used to made of it) has been in circulation since 1978 and has been strongly devalued over recent decades. Together with the Zimbabwean dollar, it is one of the world’s lowest-valued currencies. VND 10,000 corresponds to less than 50 Swiss centimes. Further examples from page 9 onward.
(In Vietnam people also refer to money as “glass.”)
… about Money
Credit Suisse Invest – The New Investment Advisory ServiceWith our investment advice you can get involved, when you want to, and discuss directly with globally connected experts. You will benefit from a variety of carefully selected investment proposals. All of this with low transaction fees.
Learn more about our individual investment solutions: credit-suisse.com/invest
This notice does not constitute an offer or a recommendation to buy or sell financial instruments or banking services and does not release the recipient from exercising his/her own judgment. Copyright © 2015 Credit Suisse Group AG and/or its affiliated companies. All rights reserved.
Finally, I get the investment advice I expect.
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CLIENT: FINCA International 1201 15th Street, NW, 8th Floor Washington, DC 20005 USAPhone: (202) 682-1510 Main Officewww.FINCA.org
Prepared By: ASHLEY ART/Karen Ashley219 Philosopher’s TerraceChestertown. MD 21620 USA
Phone: 410-810-7241 / EMAIL: [email protected]
Publication: Credit Suisse BulletinCo-op Ad: ENGLISH
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Bulletin 1 / 2015 — 1
— Editorial —
M oney is always a relevant topic, of course. But last year, as we were choosing the subject for this issue, it was evident that in terms of monetary policy, we are living in extraordinary
times. Has there ever been a period like this one, when the names of central bankers are as familiar as those of presidents?After our current issue went to press, it became clear just how relevant this topic is. On January 15, the Swiss National Bank (SNB) aban-doned its minimum exchange rate of CHF 1.20 per euro. This decision made the front page of newspapers all over the world; never before had such an event in Switzerland received so much global attention.
So what happens now? No one knows exactly; opinions and pre-dictions vary widely. We strongly suspect that Switzerland will survive.
Nevertheless, we stopped the presses so that we could comment at least briefly on “one of the most important decisions in Switzerland’s eco-nomic history,” as historian Tobias Straumann put it. We expanded our interview with Jean-Pierre Roth, chairman of the Swiss National Bank from 2001 to 2009, to include questions about the current situation. His conclusions: “Our economy is extremely adaptable” and “Switzerland’s hard currency is not a curse, but rather a distinction” (page 20).
T he two articles that begin on page 32 are now more topical than ever. Since the SNB decision, discussion of whether Eu-rope, or even Switzerland, may be moving toward inflation has
intensified. Or perhaps toward deflation? Non-experts may find it dif-ficult to understand what these often heard, but abstract economic terms actually mean. Our authors visited a middle-class family in Ar-gentina (inflation) and in Japan (deflation) to see how daily life has changed. What did they discover? Both families are struggling, but in very different ways. People in Argentina are buying airline tickets many years in advance (for purposes of speculation), while in Japan it’s very difficult to find a permanent job.
Your editorial team
“The Swiss Economy is Extremely Adaptable”
1 Carlos A. Primo BragaThe Brazilian economist with the poetic name is ideally suited for contemplating the culture of money. He has lived in Brazil, the US and France, worked for the World Bank, now lives in Lausanne and teaches MBA students at the IMD business school. Page 4
2 Sonja BlaschkeA polyglot German who has lived in Tokyo for seven years and reports for Die Welt, Spie-gel Online and many others. For this issue, Blaschke visited a three-generation family that explains what impact Japanese deflation has had on their day-to-day lives. Page 32
3 Lars JensenOriginally from Hamburg, Jensen has lived in New York for 13 years and writes for numer-ous well-known German-language maga-zines. Here, he writes about how a large amount of gold was raised from ocean floor. The SS Central America sank off the coast of Florida during a hurricane in 1857. Page 50
4 Norman KonradA 39-year-old photographer from Gotha, Germany, Konrad has received a number of awards for his work. He won the Silver Lion at Cannes and took home gold at the Euro-pean Design Awards and silver at the Art Directors Club in New York. It’s clear that Konrad is the ideal photographer for the sub-ject of this issue’s cover.
Contributors to this issue include
3
41
2
CLIENT: FINCA International 1201 15th Street, NW, 8th Floor Washington, DC 20005 USAPhone: (202) 682-1510 Main Officewww.FINCA.org
Prepared By: ASHLEY ART/Karen Ashley219 Philosopher’s TerraceChestertown. MD 21620 USA
Phone: 410-810-7241 / EMAIL: [email protected]
Publication: Credit Suisse BulletinCo-op Ad: ENGLISH
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Small photo second title: Stephen Barnes / Finance /Alamy
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Bulletin 1 / 2015 — 3
— Money —
Contents
Publishing details: Published by: Credit Suisse AG, project management: Claudia Hager, content strategy, articles: Ammann, Brunner & Krobath AG (www.abk.ch), design concept, layout, production: Crafft Kommunikation AG (www.crafft.ch), photo editing: Studio Andreas Wellnitz, Berlin, Translations: Credit Suisse Language Services, pre-press: n c ag (www.ncag.ch), printer: Stämpfli AG, circulation: 125,000, contact: [email protected] (content), [email protected] (subscriptions)
Available on the App StoreThe News & Expertise app, includ-ing the Bulletin and other current publications of Credit Suisse. www.credit-suisse.com/bulletin
50 Hunters of the Lost Treasure The thrilling hunt for billions in
gold off the Florida coast.
61 Is Money Bad for Your Character?
What research on children, upbringing and capital says.
64 “Generosity is part of love” Psychoanalyst Peter Schneider
on money and relationships.
66 Winning Strategies Scientifically proven: How you
win the game of “Monopoly.”
68 Am I a Tightwad? Questionnaire: What Type of
Consumer Are You?
4 World Atlas of Money On how different cultures relate
differently to wealth. 9 “Dog,” “Nun,” “Suitcase” A photo essay on slang for money
from around the world.
20 “The euro is a marriage where divorce is not an option”
Interview with Jean-Pierre Roth, the former president of the Swiss National Bank.
25 Clear Tasks Instead of Outdated Formulas
A call for the separation of monetary and financial policy.
27 How Much Does It Cost? An economic lesson
on the right price.
31 How the Internet Is Changing Retail
The consequences of online shopping.
32 The Threat We Face Inflation and deflation in real life.
The Future of Money
DOSSIER
How It All BeganThe history of money began with
the bartering system. — 38
If You’re Paying in Cash, Something Is WrongCash is disappearing in Scandinavia. — 39
“Banknotes are very social”A banknote designer on beauty
in the billfold. — 41
Bitcoins – Virtual MoneyWill virtual currencies bring a breakthrough or the big crash? — 42
The Minority CurrencyEntrepreneur Wences Casares is
betting on bitcoins. — 44
“Redefining Banking”Credit Suisse’s “Head of
Innovation” explains the financial revolution. — 45
Bartering Beats BuyingHow alternative trading
systems work. — 48
“There is no currency pressuring the dollar.”
Former Federal Reserve Chairman Ben Bernanke
looks ahead. — 49
Photos: Helmut Wachter; Odyssey Marine Exploration, Inc.
4 — Bulletin 1 / 2015
— Money —
90
00
2020
2020
4040
4040
6060
6060
8080
808090
00
2020
2020
4040
4040
6060
6060
8080
8080
N O RTH P O LE
S O UTH P O LE
World Atlas of Money
USAmericans don’t think it unusual to flaunt their wealth, while it is considered vulgar to do so in Switzerland, and even foolish in Bhutan.
BrazilThe attitude toward wealth for a Brazilian in a big city, such as São Paulo, is not unlike that in the US, while Brazilians in rural settings tend to be more reserved.
Graphics: Crafft
Bulletin 1 / 2015 — 5
— Money —
90
00
2020
2020
4040
4040
6060
6060
8080
808090
00
2020
2020
4040
4040
6060
6060
8080
8080
N O RTH P O LE
S O UTH P O LE
Money is important – but exactly how important ultimately depends on our cultural background, and varies around the world. Young people today answer the question of whether money brings happiness differently than their parents.By Carlos A. Primo Braga
YapIn the 19th century, the small island of Yap already had a sophisticated monetary sys-tem based on stone wheels – even though the inhabitants were predominantly self- sufficient.
SOUTHERN EUROPENegative growth influences life satisfaction more acutely than positive growth. Coun- tries such as Greece, Portugal and Spain have experienced significant declines in terms of reported life satisfaction.
EASTIn some cultures (e.g., Middle Eastern countries) bargaining is considered a sign of thrifti-ness, while in others (e.g., France) it is considered to be in bad taste.
6 — Bulletin 1 / 2015
— Money —
oney, Money” is one of Liza Minnelli’s best-known songs. The paean to money says that material wealth means the same around the world: “A mark, a yen, a buck or a pound – that clinking, clanking, clunking sound is all that makes the world go ’round.”
Most people would agree that money does matter, but exactly how is open to debate. Americans don’t think it unusual to flaunt their wealth, while it is considered vulgar to do so in Switzerland, and even foolish in Bhutan. There is also a widening generation gap in terms of attitudes to-ward money and prestige between “digital natives” and older generations. Material wealth is not as pivotal for young digital natives as it is for their parents from the post-war generation.
Does money bring happiness? That’s the 64,000 dollar question! But let’s start with the basics.
What Is Money?In economics textbooks, money is defined in terms of the three key functions that it serves: as a medium of exchange, as a unit of account and as a store of value. Typi-cally, one illustrates the importance of money by contrasting an economy that uses money with one that does not. In the second scenario, a society is reduced to barter, a situation in which each eco-nomic agent has to search for feasible exchanges between what he/she can pro-
duce or already owns and the object of his/her desire.
The transaction costs of such a search (to find the right counterparty for the bar-ter; i.e., the so-called “double-coincidence” of wants, to paraphrase W. Jevons) and the difficulties of negotiating a “price” between goods and services bartered, not only limit the dimensions of the market, but also con-strain the opportunities for division of labor and specialization, the drivers of a market economy.
Money solves these problems by facil-itating transactions as a medium of ex-change and by providing a unit of account for prices. Moreover, by holding value over time, it allows one to smooth consumption patterns and to create buffers against future needs via savings. Different cultures used different things to serve these functions over time: shells, salt, precious metals, etc.
Yap and Its FeiOne of the most unusual monetary systems was that practiced in Yap, one of the west-ern Caroline Islands, which today is part of the Federated States of Micronesia. In the 19th century, Yap was a Spanish colony, but it was later sold by Spain to Germany in 1899. In 1903 William Henry Furness III, an American anthropologist, visited the is-land and noted that, in spite of its small size (118 square kilometers), population (a few thousand inhabitants) and limited eco-nomic activity (subsistence agriculture and fishing), it had a complex culture based on castes and a sophisticated monetary system.
Furness, in his book The Island of Stone Money (1910), noted that for money, the islanders used “large, solid, thick stone wheels ranging in diameter from a foot to twelve feet, having in the center a hole vary-ing in size with the diameter of the stone, wherein a pole may be inserted sufficiently large and strong to bear the weight and fa-cilitate transportation.” The currency was called fei and the stone coins were made from limestone, which was quarried and shaped on another island (Babelthuap, Pa-lau, roughly 500 km away) and then shipped to Yap.
The system worked surprisingly well, since the coins were not in most cases moved when involved in a transaction. The
public acknowledgment that ownership of the coin had changed was enough. In fact, one of the wealthiest families in the island was acknowledged to own a large fei stone that had been shipwrecked while being brought from Palau. Although nobody could see the stone under the sea, it was used in the context of the Yap’s ac-count-keeping system to intermediate transactions and as a signal of wealth. In short, Yap’s monetary system had a solid foundation: not limestone, but the society’s collective willingness to ascribe value to the fei. This is further illustrated by an episode when the German administration wanted the local clans to help improve the island’s roads. After several unsuccessful attempts, the Germans had a simple idea. They went around the island and marked the money stones in the non-cooperating districts with a cross, claiming them for the government. This worked like a charm. The clans imme-diately mobilized the labor needed for the
Happiness Rankings156 countries ranked by the perceived happiness of their inhabitants.
1 Denmark
5 Sweden
17 United States
45 Italy
2 Norway
12 Costa Rica
24 Brazil
91 Zambia
3 Switzerland
13 New Zealand
25 France
93 China
155 Benin
4 Netherlands
16 Mexico
26 Germany
156 Togo
0 1 42 5 73 6 8
Source: World Happiness Report, 2013
Industrialized nations Emerging markets Developing countries
“M
Bulletin 1 / 2015 — 7
— Money —
road improvements and after the work was done, the Germans erased the crosses.
Milton Friedman traces an interest-ing parallel between the crosses on Yap’s money stones and the interactions between monetary authorities in France and the US in the midst of the Great Depression. In 1932/33, the Bank of France was concerned that the US would not respect the prevail-ing price for gold of 20.67 dollars per ounce under the gold standard. It decided to ask the Federal Reserve Bank of New York to convert French reserves from dollars into gold. It did not, however, want to undertake the expense of shipping the gold to Europe. Accordingly, it simply asked the Fed to store the gold ingots in separate drawers in New York with proper registration – in other words, a “Yap-style cross” solution. This event, however, had broader global re-percussions since it was perceived by mar-kets as indicating that the US dollar was weak and as a consequence helped unleash the banking panic of 1933.
Money and HappinessWith such a “fickle” foundation, it should come as no surprise that money’s relation-ship with happiness – another complex concept – is hard to establish. Lately, there have been many innovative attempts to measure happiness across countries – e.g., the World Happiness Report (see the chart to the left) or the OECD’s Guidelines on Measuring Subjective Wellbeing – and in 2011 the UN General Assembly passed a resolution asking member countries to measure the happiness of their people with a view to fostering the design of better pub-lic policies.
Cross-country studies of happiness typically conclude that, on a country-wide level, happiness is not determined by GDP per capita alone. Although high-income economies such as Denmark, Norway, Switzerland, the Netherlands and Sweden typically appear at the top of these rankings, there are also some unexpected results, with Costa Rica ranking as high as New Zea-land, Mexico at a similar level with the United States, and Brazil ahead of France and Germany (note that these rankings re-flect data for 2010–12, so they predate the results of the 2014 World Cup), while
China ranks lower than Zambia. On the other hand, low-income countries such as Rwanda, Burundi, Central African Repub-lic, Benin, and Togo typically appear at the bottom of these rankings.
The outliers can be explained by the fact that other important variables that in-fluence happiness, such as life expectancy, strength of social networks and family sup-port, cultural traits of generosity, freedom of choice and freedom from corruption are not always strongly correlated with income per capita. It is true that many of these studies find that beyond a certain point (roughly 70,000 dollars in the case of the US), the impact of more money on reported lev-els of happiness is limited. But this finding may simply reflect the weak relationship between experienced happiness and levels of well-being (these, in turn, are well- correlated with income). And it is also im-portant to acknowledge that the concept of a “satiation” point remains a hotly debated topic in the academic literature.
Millionaires in Second ClassThe cultural dimensions of how money and happiness are perceived in different socie-
ties also merit special attention. Happiness, for example, has a quite different meaning in the US – where its pursuit is enshrined in the Declaration of Independence – com-pared to Asia, where people tend to be much more circumspect about declaring that they are happy. Moreover, in some countries (again the US comes to mind) people are much more exuberant in com-municating their successes and linking them to money than others. In contrast, in Calvinist Geneva such exuberance would be interpreted as a sign of weakness of char-acter.
That is not to say that the Swiss do not consider money important. In fact, some observers would characterize their re-lationship with money as one of reverence. But the stereotypical Swiss – even if a mil-lionaire – would rather travel second class than “squander” resources on a first-class ticket. From an outsider’s perspective, it’s almost as if they are uncomfortable with their wealth.
In the same vein, in some cultures (e.g., Middle Eastern countries) bargaining is considered a sign of thriftiness, while in others (e.g., France) it is considered to be in bad taste. These differences in attitudes to-ward money also occur across the urban- rural divide of a given country such as Brazil, where a New York-style attitude towards wealth and its display can be found in places like São Paulo, while a much more reserved attitude prevails in rural settings.
The relationship between money and happiness is also influenced by the macro-economic context. Recent surveys – such as the one released in October 2014 by the Pew Research Center (see the chart above) – show a significant convergence between de-veloped and emerging economies in terms of their median life satisfaction evaluation (a proxy for happiness) as compared to an ear-lier survey (2007). Most of this convergence seems to be driven by the better relative eco-nomic performance of emerging economies. There is evidence, however, that the impact of the global financial crisis – which has been particularly strong in the European pe-riphery – has also influenced these evalua-tions. Some recent analysis suggests that life satisfaction is much more sensitive to nega-tive growth than to positive growth.
Poor and Rich Balancing OutWhere are you currently, on a scale of 0–10? (10 = best possible life, 0 = worst possible life).
Industrialized nations Emerging markets Developing countries
2007 2014
16
33
57
25
51
54
0
20
40
60 %, who answer 7 or above
Source: Life Satisfaction Report, Pew Research Center, 2014
8 — Bulletin 1 / 2015
— Money —
oratory” to observe these differences. It is a small class – only 90 students per year are accepted – but incredibly diverse. Their atti-tudes towards topics such as money and wealth, the role of globalization in the world economy, and their aspirations in terms of career and the pursuit of happiness are revealing.
These students are typical representa-tives of what we could characterize as digi-tal natives – a generation that grew up in the internet age and which puts a much greater weight on the importance of “transparency” in their everyday lives. They are skilled users of digital technologies and take for granted that information about individuals, compa-nies and countries should be easily accessi-ble and should be used to provide insights not only about career opportunities, but also to derive ethical inferences.
When asked about what they see as a “good life,” in most cases money does not come out as a determining variable. Many make reference to the fact that they would like to make a difference in their countries of origin (particularly those that come from developing countries) and almost all em-phasize the importance of the ethical reputa-tion of potential employers in determining career choices. Maybe the transparency bias (driven by technology) and the ethical con-
cerns (influenced by the repercussions of the global financial crisis) are just a fortu-nate coincidence, but I believe that we are witnessing a transformation process that will greatly influence how societies perceive and use money in the coming generations.
Ethics and Virtue Have a Bright FutureI started by arguing that money is a social construct and that in the end, beliefs (and trust) play a key role in determining its role in the social fabric of different societies. Economists have been quite influential in shaping the debate about what constitutes a “good life” (and the achievement of happi-ness) by emphasizing a materialist angle, based on the utility function of money. Money, and its related consumption op-tions, became the centerpiece of what is considered success.
The experiences of the last few de-cades (in particular, the global financial cri-sis) and the disruptive role of technology are, however, providing a return to the em-phasis on the role of ethics and virtue as important factors in the determination of happiness. Liza Minnelli is still providing the soundtrack, but the current generation seems to be much more interested in revis-iting the teachings of Buddha, Aristotle and St. Thomas Aquinas in defining their future. It will be interesting to observe how their perceptions and beliefs about the role of money penetrate the mainstream, and disruptive technologies like bitcoins (see the dossier on the future of money, starting on page 37) erode old monopolies.
Accordingly, it should not come as a sur-prise that countries such as Greece, Portu-gal and Spain have experienced significant declines in terms of reported life satisfac-tion.
Another dimension to consider is the issue of increasing inequality. It has been argued that the growth in inequality ob-served in developed economies over the last two decades adds a new rationale for the so-called Easterlin paradox (the proposition developed by US economist Richard Easterlin in the 1970s that higher incomes correlate well with happiness, but in inter-national comparisons reported levels of happiness do not correlate well with in-come per capita). According to this view, what make us feel happy is not absolute lev-els of income (money), but improvements in relative position in the social scale – in other words, feeling wealthier than our neighbors. In societies where inequality has been increasing significantly (e.g., the US) and social mobility has declined, the rat race becomes even more perverse.
Digital Natives: Money Isn’t EverythingWhat about age? Perceptions about money and happiness, beyond cultural differences, are influenced by age. The MBA class I teach at IMD has offered me a unique “lab-
Carlos A. Primo Braga is a professor of International Political Economy at IMD in Lausanne.
Money (Often) Brings HappinessWhere are you currently, on a scale of 0–10? (10 = best possible life, 0 = worst possible life).
Per capita GDP, in 1,000 international dollars, adjusted for purchasing power
%, who answer 7 or above
100 20 30 40 50
0
50
25
75
100
Industrialized nations Emerging markets Developing countries
Source: Life Satisfaction Report, Pew Research Center, 2014; GDP data: IMF, 2014
Bulletin 1 / 2015 — 9
— Money —
HUND, DENMARK, DKK – In Denmark, the 100-krone note is called a “hund” (dog), a word that sounds like “hundrede” (hun-dred). The Danish krone (crown) was introduced in 1875 and is now pegged to the euro. Interestingly enough, the Faroe Islands use Danish coins but have their own banknotes (króna), exchanged at par with the Danish krone free of charge. Greenland also uses the Danish krone; plans to issue distinctive Greenlandic banknotes made it only to the drawing board, with images chosen, before a new parliament voted to suspend them. (DKK 100 = CHF 13.79)
All the Money in the WorldEvery language has its own slang for money – sometimes affectionate, sometimes derogatory, and mostly original. Where do these words come from, and how do they reflect their particular cultures? By Sibylle Kanalz and Maria Leutner (photo selection) and Simon Brunner (text)
Photos: Jamie Chung; Reciprocity Images Editorial /Alamy Exchange rates as of January 28, 2015. Source: xe.com
10 — Bulletin 1 / 2015
— Money —
MONJA, MEXICO, MXN – The image of a nun graces the 200-peso note in Mexico, and so it is commonly called “una monja” (a nun). The image (left) is that of Sister Juana Inés de la Cruz, a writer and scholar considered to be one of the most important Latin American poets of the 17th century. Mexico’s currency is the most traded currency in Latin America (eighth most traded in the world). It shares the name peso with many currencies in former Spanish colonies. The name peso (weight) has been in use since the 16th century, when Spanish silver dollar-sized coins were called pesos. (MXN 200 = CHF 12.37)
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Photos: Toni Greaves; Pepe Rasputin16 / Wikimedia Commons
Bulletin 1 / 2015 — 11
— Money —
PETI, INDIA, INR – The criminal underworld has a particular fondness for vivid currency names, as seen in many Mafia films. In Mumbai, gangsters call 100,000 rupees “peti” (slang for “suitcase”), because a thousand 100-rupee banknotes (once the largest denomination) would fill a small suitcase. In most Southeast Asian languages, the number 100,000 is also called “lakh,” a term that may have common roots with the German “Lachs” (salmon). Although the British crown ordered all its colonies to introduce the British pound, India resisted and kept the rupee. (INR 100 = CHF 1.47)
Photos: KIN; nilanewsom / Fotolia
12 — Bulletin 1 / 2015
— Money —
WATERMELON, AUSTRALIA, AUD – Australian banknotes are colorful. Very colorful. The colloquial terms for individual banknotes are also quite unusual. A five-dollar bill is a “prawn,” a twenty is a “lobster” and a hundred-dollar bill is a “watermelon.” The ocean surround-ing Australia influences not only the bills’ nicknames, but also their material. Australia was the first country to manufacture its banknotes from polymer, making them waterproof. Australia’s decimal currency unit was initially to be called the royal, reflecting the country’s monar-chist heritage. However, this proved quite unpopular. Foreign-exchange traders dubbed it the Aussie. (AUD 100 = CHF 72.36)
Photos: Kirill Golovchenko /Agentur Focus; Kitch / Veer
Bulletin 1 / 2015 — 13
— Money —
SCHNÄGG, SWITZERLAND, CHF – In several regions of Switzerland, the five-franc coin is called a “Schnägg” (snail). The term’s origin is not known, but it probably has something to do with the coin’s shape. We do know, however, why the same coin is called a “Fünf-liber” and not a “Fünffränkler” (to go with the “Ein-” and “Zweifränkler”). The Fünfliber is older than the Swiss franc and dates back to the French five-franc notes (1795 and later), which were especially popular in Western Switzerland. Its value was equivalent to five Bernese pounds (in French, livres), and so it was called the Fünfliber. The franc was introduced as the monetary unit of Switzerland in 1850.
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Photos: Bettmann / Corbis / Dukas; rusm / iStockphoto
14 — Bulletin 1 / 2015
— Money —
BUCK, AMERICA, USD – Perhaps the most well-known nickname for money comes – of course – from the US, where a dollar is called a “buck.” The most plausible theory for its origin is that the name goes back to the value of the leather hide of a deer (a buck is a male deer) on the American frontier. Evidently this was a common unit of commerce in the 18th century; for example, five buckskins could be traded for a cask of whiskey. The word “dollar” itself comes from the German word “Taler,” and the US currency is now the most important in the world, both for transactions and as a reserve. (USD 1 = CHF 0.90)
Photos: Alessandra Sanguinetti / Magnum Photos; Chstdu / Wikimedia Commons
Bulletin 1 / 2015 — 15
— Money —
COMMODORE, ENGLAND, GBP – Few of the world’s countries have as many nicknames for money as England. Here is one clever (if somewhat far-fetched) example: In London’s Cockney dialect, which often relies on rhyme, a “lady” is equal to five pounds, because the famous Lady Godiva rhymes (with a little imagination) with “fiver.” Fifteen pounds equals three “ladies” (3 × 5), while the hit song “Three Times a Lady” was recorded by the US band the Commodores. Thus, 15 pounds is called a “commo-dore.” The pound is the world’s oldest currency still in use – it is more than 1,200 years old. (GBP 15 = CHF 20.59)
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Photos: Freek Arriens / Sunshine / Retna Ltd. / Photoshot; Nick Fielding /Alamy; Michael Weber /Alamy
16 — Bulletin 1 / 2015
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LAKAN, SWEDEN, SEK – In Sweden, the names for money are often related to the color of the banknotes. The 1,000-kronor note was long salmon-colored and was called ... a “lachs” (salmon). Nowadays it is plain white, and people call it “ett lakan” (a bedsheet). However, many Swedes liked the older banknote better, so they still call the white one a “lachs.” Although Sweden has been a member of the European Union since 1995, it has never adopted the euro. In a 2010 referendum, 56.5 percent voted against the euro. (SEK 1000 = CHF 110.44)
Photos: Eudes de Santana; DEA /A. Dagli Orti / Kontributor / Getty Images
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KOCÁPЬ (KOSÁR), RUSSIA, RUB – Russians call the 1,000-ruble note a “KOCÁPЬ” (“Kosár”) which means mower. The adjective косая also means “inclined,” “sloping,” although the connection to the note is not quite clear. Every time you spend one, they say, you cut back your own assets. The word “ruble” means “chopped-off (piece),” indicating that the original ruble was a piece of silver cut or chopped off a larger silver bar, back in the time before coins were in circulation. (RUB 1000 = CHF 13.40)
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Photos: Henry’s / Gamma-Rapho via Getty Images; Ivan Vdovin / Alamy
18 — Bulletin 1 / 2015
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FUCHS, GERMANY, EUR – The introduction of the euro made innumerable slang expressions for money across Europe obsolete. Examples include the “brique” (brick) in France (10,000 French francs) and the “talego” (sack) in Spain (1,000 pesetas). New terms are developing, but slowly; one example, not yet widespread, is “Fuchs” (fox) for 50 euros. The term originated in Germany and refers to the brown color of the banknote. Introduced in 2002, euro notes and coins are now used in 19 of the 24 EU member states. (EUR 50 = CHF 51.27)
Photos: Ramon Haindl; Legnaw / Wikimedia Commons
Bulletin 1 / 2015 — 19
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PUNCH, KENYA, KES – In Sheng, the dynamic lingua franca of Nairobi’s urban youth, a “punch” is worth 500 shillings. The origin of the term punch is not known, though it seems likely that it is related to a forced transfer of money. The Kenyan shilling has existed since 1966, when it replaced the East African shilling. (KES 500 = CHF 4.93)
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Photos: Paul Slade / Paris Match via Getty Images; Glyn Thomas /Alamy
20 — Bulletin 1 / 2015
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“The euro is a marriage where divorce is not an option”
“The chaos would be overwhelming”: economist Roth, 68.
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Jean-Pierre Roth warns that the European class is not good enough for Switzerland: “We need to be the global elite.” The former president of the Swiss National Bank in a wide-ranging conversation on Switzerland, the euro crisis and the future of banking.Interview: Daniel Ammann and Simon Brunner, photos: Helmut Wachter
are high, and the outlook is grim. The population is aging; the ratio of the working population to those who have retired will continue to worsen, health care costs are rising. In addition, the economy is growing slowly, but the European countries’ social models are based on annual growth of four to five percent. This can’t work.
Is there a way out?We have to work longer and more effi-ciently. The discussion of retirement age has to be held, everywhere. Thank God it is already quite high in Switzerland. But even here, we should also be able to work longer.
Do we have enough work?Of course. It is an illusion that the oppor-tunity to work is strictly limited. The pie can grow; we have seen this happen with the strong population growth in recent years – the pie becomes larger and larger.
Other than a higher retirement age, what do we need to manage the crisis?Social spending has to be curbed. People are being promised and guaranteed too much. Politicians today lack the courage to say, much less to do, anything about this. The picture is the same for labor market reforms. The labor mar-kets have to become more flexible –
everyone knows that, but the politicians do not want to tackle this issue.
Is the single currency also a problem? The euro was necessary within the dynamic of European consolidation.
You don’t exactly sound euphoric. The mistake was that too many countries were included in the euro zone and the criteria for acceptance were not en-forced strictly enough.
In order to correct that, a partial return to national currencies or a division of the euro have already been considered.That won’t work. The euro is a marriage where divorce is not an option.
Any marriage can be ended.No. The Europeans have created a reality that cannot be reversed. The chaos would be overwhelming.
Why did the US recover from the crisis much faster than Europe?Their labor market is more flexible; their tax system is simpler; they have relatively open borders. Immigration is possible, and the subject is not taboo. Their popula-tion is younger. The politicians have made fewer promises and are willing to tackle further reforms. In general, the US is more business-friendly than
Mr. Roth, what does money mean to you?When the monetary system doesn’t work, the economy is finished – the only thing left will be the exchange of goods. Money is an absolute necessity.
And for you personally?I save money to prepare for the future. That’s why it is so important that money maintains its value.
And that brings us to our topic: Is the euro crisis finally over?No. The term “euro crisis” is also a misno-mer. The finance ministers came up with this term to divert attention away from them. In truth, this is a public finance crisis. National debts in Europe
Jean-Pierre Roth, 68, was Chairman of the Governing Board of the Swiss National Bank (SNB) from 2001 to 2009. He studied economics, earning his doctorate from the University of Geneva where he later taught, and pursuing postdoctoral studies at the Massachusetts Institute of Technology (MIT). Following his employment at the SNB, he became Chairman of Banque Cantonale de Genève and joined the boards of directors of Nestlé, Swiss Re and Swatch. Roth is married and the father of three.
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ments are good for us, and we should do everything we can to save them.
Will we be able to maintain our level of prosperity?If we continue as we have in the past, focusing on education, on research, on quality, then we will be more productive than others and, in that case, yes, we can maintain our level of prosperity over the long term. That requires a significant effort. As I mentioned, European class is not sufficient; we need to be the global elite.
The economic crisis also became a crisis of trust in the banks. If Roger Federer stops winning tourna-ments, his salary will decrease relatively quickly. Many people found it inexplicable that a banker could perform his work poorly and still earn a lot of money. I understand this.
Have the banks and the bankers learned a lesson?Time will show where we stand. But people also have to understand that we are talking about an indus- try focused on money, unlike manufac-turing or the watch industry, for instance. The financier’s profession is all about maxi mizing returns – for his clients, too. But the crisis changed many things, even in the legislative framework.
Many things have been regulated lately – is it already too much?Sometimes I actually wonder whether all these new rules are necessary, whether anyone even grasps it all and whether they understand the costs associated with these rules. There probably has been some over-steering that has to be corrected.
The focus is on higher capital requirements. That is a simple, unbureaucratic means, isn’t it?
The cantonal guarantee is obsolete. What sense does it make?
You are joking, n’est-ce pas? As the presi-dent of a cantonal bank, I can tell you that absolutely nothing about this is unbureaucratic or simple. How to measure the capital ratio, how you weight the risk of the assets – these things are terribly complicated. It’s easy for politicians to say that the capital ratio has to be at 10, 12 or 15 percent. How a bank is managed, on the other hand, is more important. When the quality of that isn’t right, even 15 percent won’t be adequate.
The quality of management can’t be regulated.No, that’s impossible.
What then?The real problem is the “too big to fail” issue. When a company doesn’t do well, it goes out of business. Of course, this is a social problem, but not a catastrophe. We can support the employees; they can look for new jobs. In the banking sector, how-ever, people are afraid to trigger a domino effect. But banks should be able to go out of business just like any other company.
How do you imagine the future of Swiss banking?Our prospects are quite good in the operational area. Swiss banks are efficient, and in this way the difference to foreign banks is striking. And our quality is high. We are changing with the times; we were the first with the automatic clearing system along with many other innovations. And we foster an open, multilingual culture – these are all good things.
In Geneva, where you chair the cantonal bank, the cantonal guarantee will be phased out completely by the end of 2016. Rightly so?Absolutely. The cantonal guarantee is obsolete. Today, deposits of up to 100,000 francs are federally insured at all banks. What sense does a cantonal guarantee make under those circumstances?
Your colleagues at the Zürcher Kantonalbank won’t be happy to hear that.Then please give me the argument in favor of a cantonal guarantee. Two are better than one? Absurd – there certainly will not
Europe. And certainly, with the huge domestic demand, the country can also function as a closed economy.
How is Switzerland doing?Better than the rest of Europe in many respects. Our labor market is relatively flexible, we are open to free trade, and we are more globally positioned than our neighbors. But the crisis in Europe still affects us, of course. The fact that our neighboring countries are not doing well is the worst scenario for us.
What can you conclude from this?In any case, we must reduce our depen-dence on Europe. Of course, the European market is important – it accounts for 60 percent of our exports. But global competitiveness is of central importance to us, above all considering that the growth markets are outside of Europe. It must be our goal to be good for the world – and then, we will automatically be good enough for Europe, too.
What does that mean in political terms? With the acceptance of the mass immigra-tion initiative, many people failed to recognize the significance of the free movement of persons. It is likely that the benefits were not explained well enough. Clearly, there are problems associated with the high rate of growth in the foreign population, and we have to address those. But the borders should remain as open as possible. That is of central importance to our economy. The opposite of that is happening: Recently the Federal Council cut the quotas for citizens emigrating from countries other than those in the EU or EFTA. A catastrophe! Those are pre-cisely the immigrants we want. We are not referring to Filipino cleaning ladies but to top-notch scientists, engineers and other specialists.
You are calling for open borders – should Switzerland join the EU?No, no, I wouldn’t go that far – that is not an attractive option at all at this point. But the bilateral agree-
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Mr. Roth, on January 15 the Swiss National Bank decided to discontinue the minimum exchange rate between the euro and the Swiss franc. Do you know of any similar incident in history? Yes, our exchange rate regime has been adjusted before. For example: The SNB decided in 1973 to no longer peg the franc to the dollar. Within six months the dollar lost more than 25 percent of its value.
What consequences will the discontinuation of the minimum exchange rate have by the end of the year? Our economy is extremely adaptable. Early estimates show that there will be an economic slowdown,
and we can weather that. The export economy must rely more than ever on innovation and high quality. Certain activities will likely be transferred abroad.
How would you classify the current shift in mone-tary policy? I see parallels to the seventies: Switzerland is an island of stability in a turbulent financial environment. It is suffering as a result and can barely fight back.
How important is the strong franc for the identity and solidarity of Switzerland?Hard currency is an economic reality. It reflects the healthy status of our public
finances, the high savings ratio in Switzerland, the strong competitive-ness of our export indus-try, the low inflation. In a word: it’s a distinc-tion, not a curse! Is the hard franc good or bad for the Swiss finan-cial center? Above all, the financial center’s success is a result of good services; the Swiss franc plays only a secondary or indirect role here. Ultimately, I would rather have my money handled by people who have their own affairs in order.
be two payments if anything happens. I am surprised that this discussion is not being conducted on a wider basis throughout German-speaking Switzer-land. Maybe because the canton also reaps the profits of the cantonal bank?
Let’s turn to the central banks. Their rele-vance has grown significantly in recent years; hardly a day goes by without them making an appearance in the media.To me, this is a sign that the politicians are not doing their work properly. The central banks are having to do it for them.
What do you mean by that?The central banks reacted quickly and courageously, and with their monetary policy they were able to prevent the financial crisis from deepening into a Great Depression. But structural reforms have to be driven by politicians. What I am seeing today is not good: The central banks are doing a lot, and the politicians do not feel the pressure to do anything themselves.
How is the Swiss National Bank (SNB) doing?The Federal Act on the Swiss National Bank was tightened in 2002 and from then on, I was required to present an Accountability Report to a National Council commission on an annual basis.
Did that work? You always had a huge advantage when it came to the availability of information compared to the commission.Rather than focusing on technical aspects, the Accountability Report addressed price stability or economic development in general – the politicians were well aware which questions would be the unpleasant ones.
Were you ever reprimanded as a consequence?No.
In order to maintain the minimum exchange rate with the euro, the SNB had to buy hundreds of billions in foreign exchange products. There are some observers who are now warning of inflation. Does that pose a real danger?
“The hard franc is a distinction, not a curse” – Jean-Pierre Roth on the Swiss National Bank’s decision to discontinue the minimum exchange rate with the euro.
24 — Bulletin 1 / 2015
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Photos: Evan Vucci /AP Photo / Keystone; Jonathan Drake / Bloomberg via Getty Images
No, because it’s not like the central bank is injecting money into a void. There is a huge demand for liquidity, and the Swiss National Bank is providing it. The financial institutions want more liquidity on their books, just as many investors are currently holding a high cash position. That is the debit side for the Swiss National Bank, and all of the foreign currencies are on the credit side. When trust returns, the demand will lessen and the SNB can gradually reduce the liquidity. It will issue bonds and absorb the money.
The currency reserves could be invested in a sovereign wealth fund like Norway. Many mainstream politicians have called for this, as have bankers from Vontobel or Pictet.It’s a bad idea! In Norway – a petroleum exporter – the fund was not created from interventions in the foreign exchange market; rather the money comes from the surplus on their current account. That means this is where Norway invests the money it saves. For us, these currency reserves came from a monetary develop-ment. If Switzerland were to invest these reserves and then needed them quickly – because the franc was under attack, for instance – what should we do? Sell the Gotthard Tunnel? That won’t work. These funds have to remain liquid – and within the control of the central bank.
What options do small-scale investors have? Diversification is important, and I would keep a good portion of the funds liquid. Do you hold your money this way, too?I am very passive in my portfolio manage-ment. My account is with a good bank. They make bank notes and don’t advertise. [Editor’s note: the Swiss National Bank, where former employees can keep ac-counts.]
Is there a threat of bubbles?When the interest rate is so low, certain asset classes will be overvalued because investors do not know where else to put their money. That is a reality that leads to bubbles. Why did the stock market do so well last year? War almost broke out in
Ukraine, oil prices were at rock bottom, Chinese growth figures were low, Europe was trapped in stagnation. But the stock markets were booming. How can this be true? In a zero-interest rate world, many things are distorted.
University research, SNB, Banque Canto-nale de Genève, member of various high-ranking boards of directors – what is the common theme throughout your career?My commitment has never changed: I will dedicate my whole life to working for Switzerland. After the SNB, my position at a cantonal bank was an acceptable alternative; I did not want to stray too far from the public sector. And my other directorships are in major international companies where I can contribute my vision of Switzerland.
You recently titled one of your “Billets Economiques” * “I have a dream: What Switzerland can our young people dream of ?” What is your answer?I believe in Switzerland as a global plat-form. That is consistent with our tradition, and more and more it is also becoming a necessity. Already today you can visit a company in a remote valley and suddenly notice that they also sell their goods in China. Add to that the innovation. Look at the textile industry. It was almost bankrupt in the 1990s when the Italian lira collapsed. Today, many companies are doing extremely well. A while ago, I visited a company which showed me a material that was ketchup-repellent because it had the nanostructure of a lotus flower. Innovation, innovation, innovation – that is a successful Switzerland. And that is also fascinating for our young people.
You come from Saxon near Martigny – why is it that so many successful Swiss people come from Valais?Because the canton is poor! We have to leave the canton and find our success elsewhere. If you are born in Zurich, you can just stay in Zurich – that’s much too easy.
I believe in Switzerland as a global platform. That is consistent with our tradition.
* Jean-Pierre Roth regularly publishes commentar-ies on the Swiss economy, so-called “Billets Economiques.” They are available (in French only) on the Banque Cantonale de Genève website (www.bcge.ch)
This interview was conducted on December 5, 2014 and supplemented on January 19, 2015 (Box on p. 23).
“For Switzerland:” Roth with former ECB President Trichet (2004) and former Fed Chairman Bernanke (2006).
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Clear Tasks Instead of Outdated FormulasThe financial and economic crisis has shown that central banks need leeway for ad hoc interventions in the monetary and credit cycle. A clear separation between financial and monetary policy would be a first step towards long-term stability.By Oliver Adler and René Buholzer
The radical measures that central banks have taken since the financial crisis may have prevented a deeper recession, perhaps even an economic depression. But they are also cause for discomfort. The primary con-cern relates to the balance sheets of many central banks, which have been inflated to historically unprecedented dimensions since the collapse of Lehman Brothers in the fall of 2008. This is also true for the Swiss National Bank (SNB), whose balance sheet has increased almost fivefold – first because of the measures taken to support UBS, and also mainly because of massive foreign exchange purchases during the euro crisis. At nearly 525 billion francs (as of the end of October 2014), SNB’s balance sheet has now reached the level of 75 percent of gross domestic product. This is a record among OECD countries.
Although the economic data points to deflationary rather than inflationary trends, this development is fueling concerns that the situation could lead to uncontrolla-ble inflation. It is also feared that interven-tions in the financial markets and the influ-encing of interest rates and other financial market prices distort not only savings and investment decisions in the private sector, but also the distribution of income. How should these risks be dealt with?
Mechanical Rules Have FailedIt seems clear to us that the (re)introduction of supposedly simple, mechanical rules for the behavior of central banks is not the an-swer. For example, the nostalgic sympathy for the gold standard as expressed in the re-jected popular initiative “Save Our Swiss Gold” mistakenly considers that in times of crisis this limitation on the flexibility of Historically unprecedented levels: balance sheet of the Swiss National Bank.
Photo: Peter Klaunzer / Keystone
26 — Bulletin 1 / 2015
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Oliver Adler is Head of Economic Research at Credit Suisse.
René Buholzer is Global Head of Public Policy and Sustainability Affairs at Credit Suisse.
central bank policy increases the instability of the economy rather than lessening it. The gold standard always had to be given up in times of crisis, and when it was temporarily reintroduced in the 1920s, it severely ham-pered the economic recovery. Central banks were equally ineffective in sticking to tar-gets for quantities of money that were con-sidered the recipe for success for several years after the inflationary period of the 1970s.
Finally, the Taylor rule postulated in 1992 by the US economist John Taylor also failed. It required, for the achievement of a stable inflation target, a relatively mechani-cal lifting and lowering of the key interest rate, which was based on the rate of capacity utilization and the current rate of inflation. Although inflation in the phase prior to the crisis was stable and at a low level and there were only minor setbacks in the economy and financial markets, severe economic imbalances were nevertheless building up during this phase.
Making the Financial System more StableImbalances arose because financial institu-tions granted loans that no longer had any relation to the underlying capital or the growth potential of the economy. This re-sulted in leverage effects that led initially to a boom and then to a crash. In order to im-prove financial stability, the focus should therefore not be on the size of the balance sheets of central banks, but on the balance sheets of the entire financial system.
The “full money initiative” offers a solution that we consider misguided. Sig-natures for this initiative are currently being collected in Switzerland. This initiative in-tends to prevent commercial banks from creating money (liabilities side of the bal-ance sheet) by expanding their lending (asset side), because under the initiative all assets would have to be financed by central bank money.
As a result of the fact that under a full money system only the central bank could create money, the benefits of decentralized information and risk transformation sys-tems, as brought about by competition be-tween financial companies, would be nulli-fied. It also seems naive to expect that this kind of limitation on banking activities
would preclude future crises. The plan fails to recognize that “shadow banks” would fill the profitable gaps, perform lending and thereby create “money.”
The appropriate response to the risk associated with lending and money creation by the banks is not an artificial narrowing of business opportunities for banks or other financial institutions, but primarily the route that has been taken – that of strength-ening their capital base and therefore their responsibility for themselves. As shown in the report published at the end of 2014 by the Federal Council’s group of experts on the further development of financial market strategy, Switzerland has come a long way towards strengthening its financial stability. Such an approach is more useful than run-ning the significant risk of full money re-form with a very uncertain outcome.
From a regulatory standpoint too, the full money initiative is problematic. It is obvious that the SNB would be more subject to political pressure to adjust money creation to suit every economic mood or situation than if the stability of the market- driven banking system were strengthened. Such strengthening could also help to clar-ify the boundaries between the monetary authority’s and the financial regulator’s areas of responsibility, which have become
increasingly blurred since the crisis (key-word: macro-prudential measures).
Two Pillars of StabilityThe concurrent blurring of boundaries be-tween monetary and financial policy also increases the fear of inflation. If the central bank buys government bonds, it is de facto financing government deficits, while at the same time the depressed interest rates make it easier to refinance debt. And because, in addition to bond prices, the value of other assets is also rising, this policy could lead to the misallocation of capital (keyword: speculative bubbles); an additional effect that is exacerbating the debate.
In our opinion, the correct response by regulatory policy to this mixing is based on two pillars: firstly, the strengthening of the independence of the central bank from politics, and secondly, the obligation of fiscal policy to maintain long-term fiscal stability.
A good approach is the debt ceiling built into the Swiss Constitution, which should be extended to other areas such as fi-nancing of social welfare. As well as strength-ening financial stability, this would notice-ably reduce the pressure on monetary policy to solve every problem that comes along. A realistic view of debt dynamics in many in-dustrialized countries, however, leads us to fear that this pressure might increase even more over the next few years.
Political pressure is dangerous: Bundeshaus.
Photo: Stefan Huwiler / imageBROKER / Keystone
Bulletin 1 / 2015 — 27
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How Much Does It Cost?How do companies determine how much a bar of soap should cost? Why do Gillette razor blades cost the same everywhere, but not Big Macs? And how do you find the best price for an airline ticket? Here are some answers.By Florian Stahl, illustrations: SANY
1. The basics – What is the right price for a bar of soap?
The pricing of a product or service is a cru-cial part of any company’s competitive strategy (we’ll see why in a moment). Two factors have to be taken into account when setting a price: the value consumers attach to the product and demand elasticity.
Companies that sell soap need to un-derstand the value consumers in a given market or market segment attach to soap and its characteristics (the quality of the lather, fragrance, etc.). Demand elasticity describes how quickly consumers will
switch to another product, or buy more of the same product, if the price is raised or lowered.
Companies should not base the price of a product on production costs, although many still do – this is old-school thinking. Allowing production costs to determine price leads to prices that are considerably higher or lower than the value consumers attach to the product. If the price is too high, demand drops; if it is too low, no cus-tomers would be lost if the price were in-creased.
Consumers compare the prices of products that serve a similar purpose. If a
competitor is selling soap – whether in bar form, as a liquid or shower gel – that offers the consumer similar benefits at a lower price, then the price needs to be lowered.
2. Price differentiation – On hotel booking websites, I notice that there is often a differ-ence between the prices I see when I’m logged in and when I’m not. Why is that? The vendor may be trying to attract new customers (the price is lower when the user isn’t logged in) or to enhance customer
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4. Prices on the internet – Google, Facebook and other online companies offer users their services free of charge. Why?
First of all, the services provided by Face-book and Google are subject to what are known as network effects. In a network, the benefit of a service increases with each ad-ditional user. This applies particularly to in-ternet platforms, but also to software, apps and credit cards. Only when the price drops to zero is the provider able to attract mil-lions of users, which is what ultimately makes the service truly valuable to the indi-vidual. In addition, companies like Face-
loyalty (a lower price or points are offered when the user is logged in). New customers without an account may find lower prices than repeat customers who may be able to earn points or miles when booking a room. Without a loyalty program, there is no in-centive for customers to identify themselves by logging in, and vendors have no way of differentiating their prices for new and es-tablished customers. Airlines have offered a variety of prices for many years, and provid-ers of consumer goods like Pepsi and Coca-Cola have begun to do so as well. German supermarkets are now able to tar-get certain customers, and it is probably only a matter of time before Coop and Mi-gros will be able to use Supercard or Cumu-lus to identify customers who have pur-chased Coke during the past few weeks but are now buying Pepsi if it is discounted.
3. Purchasing power – Why is the price of Gillette razor blades almost identical all over the world, but the same is not true for Big Macs?
The basic goal is to adjust the price of a product to the prevailing demand and pur-chasing power in a given country. Price elas-ticity measures the degree to which demand changes relative to a change in price. It is also affected by the value attached to that product by consumers, the type of product and the brand in a given country. Since pur-chasing power – the income that is available for consumption – differs from one country to another, prices need to be adjusted ac-cordingly. As a result, many products cost more in Switzerland than in Germany. Owing to differences in price elasticity and purchasing power, the price of a Big Mac differs all over the world. Gillette blades, on the other hand, cost the same everywhere because unlike Big Macs they are not per-ishable, they can be stored for an extended period of time and they are easy to trans-port. If they were sold at different prices, this would lead to arbitrage. Dealers would take advantage of price differences by pur-chasing blades at a low price and then sell-ing them elsewhere for less than the normal price, while still making a profit.
book and Google can sell advertising space to commercial customers interested in reaching millions of users of their services. These markets bring two groups of custom-ers together: the users of the digital service and advertisers, and demand from one side affects the other. But only one group pays for the service.
5. Dynamic pricing – When will I pay the lowest price for a plane ticket?
Airlines are constantly adjusting their prices, from one second to the next, based on a variety of factors. Those include de-mand, the number of seats available on a
Bulletin 1 / 2015 — 29
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specific flight, the competitors on a given route, the day of the week, holidays and events such as trade fairs in the departure or destination city. Even the weather forecast makes a difference. In my experience, you can often find the lowest price by compar-ing several airlines, including a stopover and booking roughly two months in ad-vance. For example, it is cheaper to fly from Zurich to New York by way of London, Paris or Madrid.
6. Second-hand products – Why does the value of a new car drop by 30 percent after a year, al-though cars are durable goods?
A car’s value drops sharply because the buyer has no information about how the car was treated by its original owner. It may have suffered considerable wear and tear; the buyer has no way of knowing. If the car is sold with a dealer warranty, the price
doesn’t drop as much. Technological prog-ress plays a role as well. Automobile compa-nies are constantly updating their vehicles and making technological improvements, for example in their computer systems. Thus a car’s technological features are no longer state-of-the-art even after just a year. Since the prices of new cars increase only slightly, or in some cases not at all, the value of a used car declines significantly over time.
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8. The free economy – Music, movies, newspapers: Some contend that we have grown accustomed to a free economy. Is that true? Aren’t we willing to pay for value?
Consumers are basically willing to pay for goods and services, based on the value they attach to them. This also holds true for mu-sic, movies and newspapers. In the case of newspapers, however, which for 20 years have provided news online to consumers at no charge, the reference price – the price a
consumer or buyer is willing to pay for a certain product, based on a comparison with competing products – has dropped to zero. It is a difficult challenge to change the reference price and begin charging money for products like online news, and this re-quires a great deal of time and patience on the part of news providers. The New York Times has shown that this is possible; it now charges up to 18 dollars per month for access to its website.
9. The history of prices – A telephone call from Germany to the United States costs about 3,000 times less today than 80 years ago, but the price of eggs has remained roughly the same, after adjusting for inflation. How is this possible?
The sharp drop in the cost of telephone calls is due primarily to technological advances and competition. Opening up the telecom-munications market to competition has been a significant factor in the decrease in prices. Today this sector is a commodity service in which consumers can easily com-pare providers, and it is also very difficult for providers to set themselves apart from their competitors. In contrast, little has changed in the technology of egg production and in competition in this area, so the price of eggs is always linked to purchasing power. How-ever, eggs used in the production of foods such as pasta are cheaper than they were 80 years ago.
10. Flat-rate pricing – Why is flat-rate pricing feasible for telephone services, music streaming and internet access, but not for toilet paper? Or air travel?
It may indeed be possible in other areas as well! The online retailer Amazon offers a service called “Subscribe & Save” for cus-tomers who purchase products on a regular basis. Certain goods, such as personal care products like toilet paper, diapers, creams
7. The share economy – Cars, bicycles, apartments: People share everything. What effect does that have on price consciousness? The share economy is causing a fundamen-tal change in the value consumers attach to products like cars, bicycles or apartments. Ownership of such products is often associ-ated with a certain status, but that is of little relevance when goods are shared. Shared products are useful only in terms of their function, so people value them less highly and are not willing to pay nearly as much.
Bulletin 1 / 2015 — 31
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Florian Stahl is a professor of economics at the University of Mannheim and Mannheim Business School. His areas of specialization include price setting and pricing strategies, digital marketing and brand development.
Let’s look at this scenario: Mr. and Mrs. Smith want to buy some clothes. They log on to a retailer’s website and click on “coats and jackets.” They are immediately shown recommendations based on their previous purchases. They discuss their choices with friends on social media, decide on a prod-uct, and a drone immediately flies their purchases to their home. If the coat doesn’t fit, the drone takes it right back to the “store.”
This scenario may still be a bit far-fetched. But according to Credit Suisse’s Industry Research team, it’s hard to imag-ine the Swiss retail landscape without e-commerce, even though retailers only generated around 5 percent of their overall revenue online in 2013. In the home elec-tronics segment, for example, e-commerce accounted for one out of every four francs earned in 2013. It’s easier to compare de-vices like cameras online. Consumers rarely need to try them out in-store anymore. On-line shopping is also very popular for cloth-ing and shoes. In 2013, the clothing seg-ment generated one-eighth of its revenue online. Greater product selection and the ability to try things on in the comfort of one’s own home contribute to the popular-ity of online clothes-shopping.
Online shopping’s share of total retail revenue has grown dramatically in recent years. The trend is reshaping the structure of the retail industry. On the one hand, em-ployment growth is slowing. Online retail-ers have few, if any, brick-and-mortar loca-tions and therefore tend to need less manpower. In 2013, Switzerland’s tradi-tional consumer electronics retailers Media Markt and Interdiscount employed 40 to 140 percent more people per CHF 1 mil-lion in revenue than the online retailer Dig-itec, which has only a few points of sale.
The growth of online shopping is also putting pressure on prices. Companies that
sell exclusively online do not have the over-head costs associated with a brick-and-mortar operation: rent for retail space, fur-nishings and fixtures, and sales staff. That gives them more flexibility in setting their prices. The spread of e-commerce is also lowering the barriers to market entry – for foreign retailers as well. Amazon.de offers Swiss shoppers the same books as books.ch, for 5 percent less, including shipping and customs duty.
As e-commerce increases its share of the retail landscape, retailers are having to spend more on their IT infrastructures. Ex-isting systems often have to be adapted to online retailing and generally need to be ex-panded to accommodate the complexities of shipping and returns.
In the future, e-commerce will play an increasing role in shaping the retail indus-try. Our Industry Research team estimates that the share of retail revenue generated online will grow to 11 percent by 2020.
How the Internet Is Changing RetailThe trend toward online shopping is reducing employment and price growth, while increasing IT spending in the retail industry. By Patricia Feubli
and shower gels, as well as groceries and household items, can be delivered regu-larly and at an interval determined by the customer, and with a discount of five per-cent. Such services are becoming increas-ingly popular in the United States and Europe, and they bear some resemblance to the contractual arrangements associ-ated with flat-rate pricing. In the air travel sector, flat rates make little sense for the airlines, since price elasticity and custom-ers’ willingness to pay would fluctuate a great deal over time. It is therefore in the interest of the airlines to sell tickets on an individual basis.
2014 2020
Home electronics
ClothingGeneral retail Food
Forecasts: The Growth of Online RetailShare of total revenue generated through online shopping
Patricia Feubli is part of the Swiss Industry Research team at Credit Suisse.
40 %
30
20
10
0
Sources: GfK, VSV, Credit Suisse
Graphics: Crafft
32 — Bulletin 1 / 2015
— Money —
Argentina: “Dollars or Bricks”
Myriam Simone, 39, with her husband Leandro Checa, 41, and their two sons, Martín, 7, and Agustín, 1: Inflation rates of more than 40 percent make planning even the most careful household budget nearly impossible. The costs of food, school fees and gasoline keep going up; real estate loans at 22 percent interest are still considered favorable.
Photography: Irina Werning
Bulletin 1 / 2015 — 33
— Money —
20 %
10
0
just never know what will happen in Ar-gentina!”
Time and again, people who live in the world’s eighth largest country have suf-fered from the unpredictability of its econ-omy. In the past seven decades, there have been only 14 years in which the inflation rate was below 10 percent. The peso has fallen to just 0.00000000000005 of its value in 1963. Four currency reforms in 40 years led to depreciation by 14 decimal places. The authorities governing this resource-rich country combine an aversion to budgetary discipline with belief in a miracle cure. Many economists blame the inflation rates under the Kirchner dynasty, in power since 2003, on its pursuit of quick results. Presi-dents Néstor and Cristina Kirchner used government subsidies to fuel domestic con-sumption, which created jobs and boosted tax revenues.
The inflation rate climbed into double digits as early as 2005, a fact that the gov-ernment tried to cover up. Year after year, prices rose by 20 to 25 percent. Driven by steadily rising commodity revenues, that worked out fairly well for years, because
InflationA continual decline in the value of money, with prices rising across the board. Each unit of currency buys less and less; that is, purchasing power declines. A major factor in the onset of inflation is the amount of money circulating in the national economy. When the supply of money is too great for the aggregate quantity of goods, inflation can ensue. If the demand for goods exceeds the supply of goods, which cannot be increased in the short term, prices rise and inflation sets in. Depending on the pace at which the currency loses value, inflation is described as creeping inflation, walking or trotting inflation, galloping inflation or hyperinflation.
The Threat We FaceExperts currently view Europe as threatened by both inflation and deflation. But what do these abstract terms mean in real life? We visit two middle-class families, one in Argentina (inflation) and one in Japan (deflation).By Andreas Fink (Argentina) and Sonja Blaschke ( Japan)
ARGENTINA – 2014 was a hard year. For the first time, Myriam Simone really had trouble making ends meet in her household budget. And she came to realize that even 19 years of experience in banking had left her unprepared to accurately anticipate the cost of living in Buenos Aires.
Myriam Simone, 39, and her hus-band, Leandro Checa, 41, have two chil-dren. Shortly before the birth of their sec-ond son, Agustín, they decided that she should apply for six months of unpaid pa-rental leave. Both are good with numbers; they both work at a bank, in middle man-agement. Using Excel spreadsheets, they had added up all their expenses. Food, school fees, car, vacation. They had also allowed for inflation, calculating price in-creases at 25 percent. The numbers all worked out.
Belief in a Miracle CureBut one year later, the inflation rate had climbed to 40 percent, and the price of food and fuel had risen even higher. “We had to max out our credit cards,” says Leandro Checa. “And once more, it was clear: You
20052009
2006201
02007
2011
2008201
2201
3
GDP DEFLATOR IN ARGENTINA (annual change in price index)
Sources: “Duden Wirtschaft von A bis Z” (definition), World Bank (graph)
34 — Bulletin 1 / 2015
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salaries kept pace. But in 2011, Cristina Kirchner introduced foreign exchange con-trols that all but stifled foreign investments. After that, inflation held sway. Where once there was growth, today recession prevails. The US court ruling that forced Argentina to cease servicing its debts as a result of its dispute with holdout creditors of its 2001 debt default has exacerbated this dilemma, with Argentinians feeling the effect.
Everything Costs MoreLeandro Checa recites the list: “School fees for our seven-year-old son Martín: three increases in the past year, from 2,000 to 3,200 pesos. A tankful of gas: 400 pesos a year ago, 700 today.” Other costs likewise soared: highway tolls, subway cards, eating out. Myriam used her parental leave time to comparison shop. Now she knows which stores in her neighborhood (Villa Urquiza in Buenos Aires) have the best prices for cheese or baby cereal.
Certainly, it’s not the supermarkets. Their markups are higher in Argentina than anywhere else in the world. The reason is
the complete absence of reference prices. To keep peace with the government, the super-market chains offer about 500 products at low prices agreed upon with the Economics Ministry. Of course, Myriam Simone takes advantage of these “precios cuidados” (care-ful prices). And she also accepts promotions – likewise initiated by the government – that let her pay in 12 interest-free install-ments for clothing or electrical appliances made in Argentina. The state-owned air-line, Aerolíneas Argentinas, offers 24 inter-est-free installments for long-distance travel; the airline accrues 2 million dollars in debt every day.
Airline tickets are popular speculative commodities for the middle class. After foreign exchange controls were introduced, many families took advantage of the low
dollar exchange rate to book travel for sev-eral summers in advance.
Travel abroad is still a dream for the Simone/Checa family. They hope that in 2015, with two full salaries, they can com-plete the homebuilding project interrupted by her pregnancy and parental leave, be-cause their 55-square-meter apartment on the 15th floor of a high-rise building is too small for four. For the past five years, they have been expanding and modernizing Le-andro’s parents’ house in the suburb of San Martín. Because they both have secure jobs, they were each able to obtain a loan, unlike many Argentinians: one at 17 percent inter-est, the other at 22 percent. In most coun-tries, that would be considered usury. “Here, it’s almost a gift,” says Leandro Checa. To-day, financial institutions charge 39 percent interest for private loans.
Renovating and expanding real es-tate properties are among the few legal op-portunities for Argentinians to protect themselves against inflation. The reason is that houses and apartments are modern-ized with pesos, but still bought and sold in dollars. “People who can save money have two possibilities here: dollars or bricks,” says Checa. But dollars are hard to come by. “My father always said, ’I only be-lieve in bricks!’ And that’s as true today as it was then.”
—
JAPAN – It took Hiroyuki Sugano a while to notice that something was wrong. Now 54 years old, he had long worked for a com-pany that produces mobile ordering sys-tems for the food service industry. In the past, customers replaced the equipment ev-ery three years. Then the cycles became lon-ger and longer: first five, then seven years. In the end, many restaurants kept their equip-ment as long as it continued to work. It be-came increasingly difficult for Sugano’s company to stay in business. The workforce shrank from more than 4,000 employees to nearly half that.
In 1989, Japan’s real estate bubble burst. The booming growth that had made the country the world’s second largest econ-omy came to an abrupt end. Deflation – a word that most people know only from
textbooks, if at all – became the stark reality. Prices and wages stagnated or fell. Compa-nies curtailed production; the economy shrank. Time and again, Japan slid into a recession. Despite a brief recovery in 2003/4, the “lost decade” of 1990 to 2000 lengthened into two “lost decades.” For most people, the changes showed up in little ways. For example, Sugano recalls, his take-home pay shrank as allowances were dropped, one by one. On business trips, the hotels became cheaper and the food worse. His salary also decreased, by as much as 20 percent.
The “Historic Experiment”When the Liberal Democratic Party re-turned to power at the end of 2012, Prime Minister Shinzo Abe vowed to make eco-nomic policy his top priority. “Abenomics,” a combination of a relaxed monetary policy, stimulus packages and structural reforms, aimed to restore growth. The goal was for deflation to give way to an annual inflation rate of 2 percent. Haruhiko Kuroda, the new head of Japan’s central bank, declared in April 2013 that this target would be
Supermarket markups are higher in Argentina
than anywhere else in the world.
DeflationA persistent fall in the general price level in the economy; that is, goods and services cost less and less. Deflation occurs when the aggregate quantity of goods exceeds the supply of money; that is, total demand is less than total supply within the economy. Deflation can occur, for example, when the central bank takes monetary policy steps that excessively constrict the money supply; or when import surpluses are high, so that money flows out of the country; or when goods are over-produced.
20052009
2006201
02007
2011
2008201
2201
3
GDP DEFLATOR IN JAPAN (annual change in price index)
0
–1
– 2 %
Sources: “Duden Wirtschaft von A bis Z” (definition), World Bank (graph)
Bulletin 1 / 2015 — 35
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Japan: “A Creeping Change”
Hiroyuki Sugano, 51, with his wife Kazuko, 51; his three children, Kohei, 21, Kumi, 19, and Mami, 15, and his mother, Kieko, 81. Stagnant wages with rising prices and taxes put a strain on this three-generation household. The Japanese people are experiencing a previously unknown feeling: worry about the future.
Photo: Keiichi Nitta
36 — Bulletin 1 / 2015
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reached within two years. To that end, he initiated a series of measures to pump cash into the Japanese economy, most recently in October 2014.
Economist Franz Waldenberger, di-rector of the German Institute of Japanese Studies (DIJ) in Tokyo, calls this a “historic experiment.” “Since the Great Depression of 1929/30, modern economies have only had the problem of curbing inflation through monetary policy,” the professor says. “No monetary authority has yet at-tempted to reach an inflation target from below, as it were.”
After the initial euphoria, it is becom-ing increasingly clear that the targeted in-flation rate is still a long way off. Japan re-cently slipped into its fifth recession since 2000. Demand is not gathering momen-tum. One reason is that many young people, like Hiroyuki Sugano’s oldest son, Kohei, 21, are worried about the future and curbing their consumer spending. According to Doerig, “No matter which party is in power, the economy is not going to change over-night.” Kohei has never known his country’s economic situation to be anything but strained. Having dropped out of school, he works in a DVD rental store. He doesn’t know what else he could do or would want to do. The one thing he does know is that he needs to find some kind of permanent posi-tion as soon as he can.
Worried about His ChildrenKohei knows from his father’s situation how hard it is to find a job. At 50, Hiroyuki Sugano accepted a severance package from his faltering company and left. It took a whole year, however, for him to find a new position. Now he works in purchasing at a small import company. But the weak yen, an effect of Abenomics, makes importing goods more expensive. Sugano takes some comfort in the fact that so far sales have held stable.
A father of three, he considers stabil-ity important for planning purposes. Major expenses still lie ahead, especially for educa-tion. His youngest daughter Mami, 15, is still in middle school. Her sister Kumi, 19, has started college. And it’s not clear what will happen with his son Kohei. Sugano worries about his children.
Andreas Fink is the South America correspondent for “Focus” (Germany) and “Die Presse” (Austria). He lives in Buenos Aires.
Sonja Blaschke is a freelance journalist in East Asia and a television producer for German- language media. She has lived in Japan since 2005.
Despite all these uncertainties, the family always had some sort of income, even while Sugano was out of work. At least his wife Kazuko, 51, has a secure job. She works for a company that makes oxygen apparatus products – a business with a future in Ja-pan’s rapidly aging society, regardless of the economic situation.
But Japanese society is not just aging; it is also shrinking. This is one reason that many companies have hesitated to expand their production capacity, says Walden-berger. Given this situation, he doubts that it makes any sense to stimulate further in-vestments with a relaxed monetary policy. In his view, rather than relying on growth, the country should be pursuing greater pro-ductivity.
In the decades ahead, fewer and fewer people of working age will have to pay for more and more elderly citizens. Not all are as fit as Hiroyuki Sugano’s mother, Kieko.
At 81, she still works four hours a day in a small biscuit factory. Not because she really needs to; she just enjoys it, she says, and it allows her to go on little shopping trips with her friends. She has never thought about such things as inflation and deflation. “I always had work, and that was enough for me.” She never worried about the future. In the seventies and eighties, nobody thought about it, says her son, Hiroyuki. Only when the economy faltered did people begin to ask themselves what the future might bring.
The Sugano family does own its small plot of land in northeast Tokyo, but they are still paying off the loan for the house itself, which they took out during the boom years. They find it very difficult to save money. For financial reasons, they go out less, and they rarely eat in restaurants any more. In the past, they never worried about paying the
bills for water, electricity and gas. That has changed, Hiroyuki and Kazuko say.
There’s Less in the PackageLike most of the population, the Sugano family is unaffected by the promises of the Abe administration. According to Abe-nomics, companies would see their profits rise and their employees would receive higher wages. This would have offset the rising prices under inflation. So far, how-ever, only a few major firms have boosted salaries. But most Japanese people work in small and medium-sized companies, where salaries remain stagnant. Furthermore, in April 2014 the consumption tax rose from 5 percent to 8 percent. Since then, more and more Japanese consumers have had to think twice about spending their yen. The reason is that after years of deflation, businesses took this as an opportunity to raise prices – often by 8 percent in one go.
Others chose an indirect approach, as Kazuko learned while shopping for her three-generation household. She likes a particular brand of natto, fermented soy-beans, for breakfast. “I was happy when I saw that the price had gone down. But then I noticed that the package simply contained less than it had before.”
Japan recently fell into its fifth recession
since 2000. Demand is not gathering momentum.
The Future of Money
DOSSIER
The first automated teller machine, so the story goes, was fabricated by a hobby inventor in 1939 and operated as an experiment by the City Bank of New York (now Citibank) – and with such a lack of success that it was dismantled just six months later. There was no demand for money from an ATM.
History repeats itself – the difference being that today it is not a new device being introduced but a wide variety
of different apps, online services and digital currencies simultaneously. Nobody can know for sure which of these innovations will ultimately succeed in establishing itself. This dossier takes stock: What use are bitcoins p.42? What is life like without cash p.39? What is the task of the bank of tomorrow p.45? And how does the former Chairman of the US Federal Reserve, Ben Bernanke p.49, see the future of the dollar?
DOSSIER / MONEY
Around 2,000 BC, all cultures used what
is known as commodity money. A key feature
of this type of money was that its users recognized
the utility or beauty of the tokens as equivalent to the goods them
selves. The forms the money could take
included tea, shells and cocoa; and items
such as teeth, iron, animal and plant products
like furs and spices were also used as means
of payment.
In modern times, confidence in paper
money was initially based on the fact that it could
be converted into coinage at any time. One of the few disadvantages
of trading with coins – the weight of the coins themselves for larger payments – was thus
eliminated. Backing bank notes with precious
metals – primarily gold – became known
as the gold standard.
Paper money as an alternative to coins was invented in China in the 11th century in response to a shortage of coins. In Europe, paper
money was first issued in Spain in 1483. On July 16, 1661, the Bank of Stock
holm issued different bank notes for the first
time in Europe.
Around the time of the birth of Christ, the Roman Empire introduced
the silver denarius, along with other gold, bronze and copper coins. Its stability over the next two centuries contributed to the rise of Rome. Reduced silver content in the denarius resulted in the currency’s collapse in 300 AD.
Around 700 BC, gold
and silver became the prevalent
method of payment. These
precious metals had the benefit of being easily
transportable, durable, easily di
vided and stable in value. But their crucial flaw was
that they had to be weighed – a
process that was both inconvenient
and imprecise.
A Brief History of Money
People have traded things since ancient times, such as one cow in exchange for three sheep. Bartering is at the heart of the monetary system; even today, any payment in exchange
for goods is fundamentally no different than a trade.
It all began with bartering.
Too little silver in the denarius sparked hyper
inflation in 300 AD.
38Photos: GlobalP / iStockphoto (2); Ullstein Bild; f9photos /
iStockphoto; Wikimedia Commons; inhousecreative / iStockphoto
“If you’re paying in cash, something is wrong”Sweden was the first European country to implement paper money; now it is the first to eliminate it. In Scandinavia, the future has already begun.By Mikael Krogerus
DOSSIER / MONEY
39
Over the course of the 20th cen-tury, payment by means of intangible and electronic
money became commonplace.
However, intangible money (book money, account
credits, giro money) already
existed in previous centuries.
The Bretton Woods sys-tem was in place between
1944 and 1973 and served to establish
fixed exchange rates between currencies,
define the dollar as the global anchor currency
and require only the US central bank to convert
its bank notes into gold.
Travelers to Scandinavia inevitably make two observations: First, not all natives are blond (only 25 percent of the adult popula-tion is naturally blond). Second, there is no longer any cash. No matter where you are or what you want to purchase, you will find a small ubiquitous sign saying “Vi hanterar ej kontanter” (“We don’t accept cash”). Whether it’s for mulled wine at the Christ-mas market, a beer at the bar, even the smallest charge is settled digitally. Even the homeless vendors of the street news-papers Faktum and Situation Stockholm carry mobile card readers.
In 1661 the Swedish central bank was the first in Europe to issue paper money. Now it is the first to eliminate it. What may sound rather risky to the skeptical Swiss is no big deal in Sweden. Four out of five pur-chases here are made electronically. Plastic dominates, particularly in the retail sector, where 95 percent of all sales are handled with cards. The last area in which a Scandi-navian still needs cash is the purchase of illegal items such as drugs. In general, the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.”
Embraced by the CitizenryIt’s unclear when exactly cash lost its luster. What is clear is that the six largest Nordic banks (with the exception of the merchant banks) have been gradually weaning them-selves off cash since 2010. The citizens have embraced this move as if it were the most natural thing in the world. Between 2010 and 2012 alone, more than 500 branches went cash-free. During that same time 900 cash machines were removed, which re-sulted in the second-to-worst cash ma-chine coverage in Europe. One of the last places where cash can be obtained is at the supermarket checkouts. There one can re-ceive up to 500 Swedish Krona (CHF 55) in cash per purchase.
“By 2030 we will be completely cash-free,” says Niklas Arvidsson, adjunct pro-fessor at the Royal Institute of Technology and author of the popular study “The Cash-less Society.” In his work, he outlines the main reasons for the demise of cash.
From the bank’s perspective, a cash-free society offers the opportunity to avoid complex cash handling and eliminate bank robberies, theft, and dirty money.
PAYING WITH PLASTIC
Bretton Woods conference, 1944.
Photo: Thomas D. McAvoy / The LIFE Picture Collection / Getty Images
DOSSIER / MONEY
4040
Security is the external sales pitch. Internally, transaction charges provide an opportunity for profit, but there has also been a funda-mental shift in strategy. Whereas a few years ago banks focused on corporate and large private clients, today the main target is the individual client. A fully digitalized payment environment provides the bank with precise information about how much money each customer spends, where, and on what. What exactly this data is used for – other than advertising – remains to be seen. The idea is to be closer to customers than they are to themselves and to offer solutions before customers even see the problems. This is the motto under which these mountains of data are analyzed.
One of the few with a critical per-spective on this development is former chief of police and former Interpol presi-dent Björn Eriksson. In his polemic paper The Cards on the Table, he describes the idea of a cash-free society as a money- making plot by the banks. He contrasts the decreased incidence of bank robberies with a drastically increased rate of cybercrime. According to Eriksson, the public hears lit-tle about the growing number of hacking attacks against bank servers. Even less well-known is that these “virtual bank robberies” don’t target the banks’ vaults, but rather their databases.
Debit Cards for SevenYearOldsFrom the customers’ perspective the death of cash is the next logical step, mimicking their current habits. Most Scandinavians have not carried any cash or been to a bank in years. Children have pocket money transferred into their accounts, and in Nor-way seven-year-olds are allowed to pay with a debit card. Even the prospect of hav-ing a complete record of their personal ex-penses stored seems to leave most citizens relatively unperturbed. Behind this accep-tance lies the perception that the govern-ment, the authorities and even the banks are trustworthy. If there is any audible crit-icism, it is about insufficient digital infra-structure in rural areas. Arvidsson explains that his fellow citizens’ relaxed attitude to-wards these drastic changes is due to their
high affinity for anything digital. Sweden is not only the first country in which church collection is payable with plastic, it is also the first country in which every child re-ceives a government-issued iPad on the first day of school, as well as the first coun-try in which children learn to write on a keyboard, not by hand.
Women’s suffrage, free wifi, hipster beards and now a cash-free society – many things that were unimaginable in the past but are quite ordinary these days had their start in the North. If it is true that Scandi-navia presents a reliable barometer for soci-etal developments, then one can look ex-pectantly towards the North and ponder which will demand a higher price: Being the first or the last to do something new.
Mikael Krogerus is a journalist and book author. He was born in Stockholm, grew up in Sweden and Germany and is a Finnish citizen.
Digital is better: In Stockholm even street newspapers can be purchased electronically.
Collection by credit card: a church in southern Sweden.
Photos: Melker Dahlstrand / Image Bank Sweden; Camilla Lindskog / AP Photo / Keystone
Norway’s new banknotes, which will be in circulation starting in 2017, have generated a lot of discussion. The “pixel bills” are the result of a design competition held by the central bank of Norway, which stipulated “the sea” as the theme. The front side of the paper money was created by The Metric System design firm and features a more tra-ditional photograph. The award-winning Snøhetta design firm, based in Oslo and specializing in architecture, designed the back side, which displays colorful motifs made up of large pixels, symbolizing waves, coastlines or wind. What is the thought behind the pixels? Martin Gran, managing director of Snøhetta, explains.
Mr. Gran, your office is known for architec-ture, design and landscape design, and now you’ve created the “pixel bills.” What factors influenced your design?Form follows function in everything we do. More importantly, there needs to be an overarching vision. Banknotes must also have numerous security features embedded in them, and ultimately money has to represent a country’s identity.
Were you surprised that the central bank chose such a bold design? Central banks are generally regarded as rather conservative.We submitted what we believe in, and we were sure that our concept would win people over. But of course we knew that our designs went pretty far, so the central bank also deserves recognition for its choice.
After your own bills, what is the most beautiful banknote of all time?I liked the designs that Stockholm Design Lab came up with in 2012, which unfortunately didn’t gain acceptance at the time. And of course the dollar, which is a classic. Its simplicity is a mile-stone of currency design.
Is it just us, or are banknotes getting smaller and smaller?No, it’s true. Size is no longer so important.
What do you recommend? Should you keep your money in your wallet or carry it more visibly in a clip in your pocket?By all means, use a clip so that your money is as visible as possible.
Norway ranks among the richest countries in the world. What kind of relationship do your countrymen have with money?I don’t think we Norwegians have a special relationship with money per se, but we’re aware that our strong welfare state, stable economy and secure pensions cannot be taken for granted.
DOSSIER / MONEY
4141
DESIGN
“Banknotes are very social”Are Norway’s new banknotes a stroke of genius or a “printer’s error?” Designer Martin Gran explains.Interview with David Schnapp
What do the pixels represent?We liked the fact that the oldest forms of mosaics – which is essentially what pixels are – come from Abra in Mesopotamia and date back to around three thousand years before Christ. At the same time, most of the pictures we see today are made up of tiny pixels. You could say that our design links the past to the present.
Should banknotes be designed to make someone want to keep them or want to spend them as quickly as possible?To keep them! It would be nice to think that our efforts had the effect of dissuading people from wanting to buy everything immediately. On the other hand very few design pieces change hands as often as a banknote. Viewed in that light, banknotes are very social and bring people together.
“Form follows function”: Martin Gran on the new Norwegian banknotes.
Photo: Snøhetta
Who Controls Bitcoin?There is no central authority and the developers work for free on the open source software. A chief developer provides new software, but the “miners” can decide themselves whether to install updates – creating a system of “checks and balances.”
DOSSIER / MONEY
42
Bitcoins – Virtual Money Money without physical form: Bitcoins and other virtual currencies have grown into a global phenomenon. Some see the beginning of a new era, others see the potential for a major crash.By Jonathan Horlacher
In just five years, the new bitcoin currency has grown from a small niche project by some computer geeks into a global phe-nomenon – despite some dubious transac-tions. And devotees of the bitcoin system are already predicting the next upheaval in payment transactions. But first things first: What are bitcoins anyway? And why are they so groundbreaking?
Virtual or digital currencies such as bitcoins have been a part of daily life for a long time: reward points from the super-market, credit card points or air miles. In contrast to national currencies, however, they are available only within the program of the company in question. This is a major disadvantage of each of these virtual cur-rencies. If a company cancels or alters its rewards program, the majority of a person’s balance could suddenly become worthless.
Bitcoins, on the other hand, are de-centralized. There is no central issuing au-thority; the system is distributed across all participating computers. Whether this is a decisive advantage is the key issue for the future success of bitcoins.
How Does Bitcoin Work? In order to gauge the chances of success of the system, you first need to under-stand how bitcoins work. Bitcoin is the largest and best known of hundreds of dig-ital currencies, such as Ripple, Litecoins,
DIGITAL CURRENCY
What is bitcoin?Bitcoin was formed as a user network for online payments with out a central authority. Since the beginning of 2008, bitcoin has developed into a technology, a currency, a security and an online community. Bitcoin trans fers are irreversible, accounts cannot be frozen and transaction costs are low.
Where do bitcoins come from?A process known as “mining” involves “miners” making their computers available to verify transactions. These users are paid in bitcoins proportionately based on the computing power that they provide.
Source: http://bitcoinsimplified.org
3.25
3.25
Graph: Crafft
DOSSIER / MONEY
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Dogecoins, etc. They all have a fundamental problem: the lack of physical form. They consist only of data. And data can be copied without a great deal of effort. There is there-fore a risk of the same “digital coin” being spent more than once.
When a bank transfer is made in on-line banking using traditional currencies, the bank guarantees that it deletes the money from the issuing account and credits it to the recipient. Bitcoins do not require a central authority. The system is based on peer-to-peer software, such as that used in music sharing. Each user has a personal, but anonymous address (similar to email) and the bitcoins as cryptographic codes (like passwords), which is why bitcoins are known as cryptocurrency.
The software now essentially consists of a trade repository, the block chain. All transactions are recorded there based on the template: “User XY sends 10 bitcoins to user YZ.” The transactions are appended to the trade repository in blocks every ten minutes, which continues as a chain (hence “block chain”).
The software provides security in that, in each case, it only observes the lon-gest chain of transactions and all others are ignored. The underlying assumption is that a majority of users are behind the longest chain. This means that transactions cannot be revoked once they have been performed and there is no risk of double payment. For the end user, the system is very similar to that of an online credit card payment. It has the advantage of being easy and cost-effec-tive, and there are no credit card charges. But in order to acquire bitcoins, you have to exchange them for traditional currencies in a virtual currency exchange. Once the bit-coins are stored, you can use them for pay-ments.
Limited Money SupplyIf there is no central bank, how can the money supply be increased? The surprising answer is: by using a kind of quiz. So-called miners use their computers to solve a com-plex mathematical problem. The miner who finds the key first is rewarded with 25 bit-coins, and the block chain is extended. Cur-
rently, 25 new bitcoins are being created ev-ery ten minutes. This reward is halved every four years; starting in 2018, only 12.5 bit-coins will be paid per block. This means that the money supply is limited and is expected to be completed in the year 2140 at a level of 21 million bitcoins.
With this mechanism, together with the system infrastructure, money creation is also regulated in a decentralized manner. There is no central bank that issues the cur-rency. This rigid mechanism and the fact that no central bank can weaken the currency by expanding the money supply explain the en-thusiasm of ultra-libertarians for bitcoins. They consider the virtual currency to be a protection against currency devaluation.
A Currency with Teething TroublesBut what are bitcoins really? A currency? A security? Or digital gold? All three defini-tions are accurate to a degree.
Because bitcoins have properties that differ fundamentally from national curren-cies, an exact definition is difficult. With their limited supply and the possibility of storing value, bitcoins are similar to gold, although they have no physical existence. Many users hold bitcoins as an object of speculation. Temporarily high expectations (repeatedly unfulfilled) of a breakthrough as a currency have subjected bitcoins to wild price fluctuations (from 100 dollars to over 1,000 dollars in 2013, to a current value of between 300 dollars and 400 dollars). These factors point more toward bitcoins being a security, albeit a risky one. Tax au-thorities in several countries have taken this view, which is why capital gains taxes are being imposed on bitcoin price gains, while transfers are exempt from VAT.
The low transaction costs and easy transfer around the globe point to a cur-rency, as does the fact that you can already pay many online providers with bitcoins. A currency with teething troubles – which include the fluctuations – perhaps, but a currency nonetheless.
Confidence Is EverythingDo bitcoins have the potential to become commonplace and to dislodge the money
monopoly from the central banks? The out-look is not good. Even if distribution as a means of payment continues to increase, the system’s advantage – decentralization – is also its biggest drawback. Unlike legal tender, there is no authority that guarantees the value of the currency, and bitcoin does not benefit from the resulting confidence. In the end, this confidence is crucial for any currency whose usage extends beyond the exchange of goods.
A currency is only worth what you believe you will be able to purchase with it tomorrow. If this confidence is removed, the value of the currency can decline rap-idly, which is what happened with bitcoins at the beginning of 2014. The opposite is also harmful: The increase in value bitcoins experienced in 2013 would have corre-sponded to an economically crippling de-flation if they had been the general means of payment. These fluctuations in value are what is stopping bitcoins from becoming more widespread as a means of payment.
Nevertheless, bitcoins have a future in certain areas and countries. When com-bined with the traditional financial system, bitcoins could have cost advantages over credit cards or providers such as Western Union when used as a transaction system. In countries such as Argentina and Zimba-bwe, where confidence in the country’s own currency retaining its value is very low, bit-coins are an alternative that is being used with increasing success.
In the end, the question remains: Who do you trust more, your own central bank or an anonymous online network?
Jonathan Horlacher works in Fundamental Macro Research at Credit Suisse.
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giant Activision. He then founded Banco Lemon, which focused on the millions of Brazilians without bank accounts – known as the “underbanked.” In 2009, he sold it to Banco do Brasil. His last undertaking was the digital wallet platform Lemon Wallet, which was taken over by the US company LifeLock.
Solution for Weak PointsFor Casares, bitcoins are not some dubious hacker experiment; instead, they are the breakthrough that could revolutionize the financial world. But when he tried to store his own bitcoins, the Argentine was unable to find a provider that met his high stan-dards. That’s why he founded Xapo in Palo Alto, California.
With 60 million dollars in venture capital from the best sources in Silicon Val-ley behind it, Xapo has been attracting cus-tomers since spring 2014. The company offers a solution for bitcoin’s three areas of weakness, a solution that is also reliable and comprehensible for laypeople: a secure vault, a type of checking account so pay-ments can be made worldwide just as easily as with regular money, and a bank card to ensure that there is a link to the traditional euro and dollar financial system for pur-chases and transfers.
“Bitcoin will become a global pay-ment system and has the potential to change the lives of more than five billion people who do not have access to traditional ac-counts,” says Casares, not without some personal interest. “Companies like mine have an obligation to create the infrastruc-ture and the tools so people can experience the advantages of this currency.”
Wences Casares is no late bloomer. The son of an Argentine sheep rancher from the re-mote Tierra del Fuego region, Casares is 40 and has already founded seven companies, sold five of them and sailed around the world with his family. For the past two years, the college dropout has been seeking to help the virtual currency bitcoin achieve a breakthrough with his startup Xapo.
For the Argentine, the virtual cur-rency serves a basic function: “Ultimately, money is a means of communication, and technologies that make it easier for people to understand one another almost always gain acceptance – like email did in the 1990s. With six million users around the
world, bitcoin is not a majority currency. In order for us to be able to change the world, we need to reach a billion people. There’s no doubt we’ll get there, but it’s a long road,” he admits.
Launch and SellThere’s no doubt that Casares has a good feel for trends. At 19, he founded and then sold the first internet service provider in Argentina. This was followed by an online platform for shares, which Spanish bank Banco Santander bought for 750 million US dollars in 2000. Next, Casares launched a video game developer called Wanako Games, which was snapped up by industry
ENTREPRENEUR
The Minority Currency
Steffan Heuer is a technology journalist and author; he lives in San Francisco.
Can you earn money with bitcoin? Argentine entrepreneur Wences Casares is banking on it.By Steffan Heuer
Photo: Mark J. Davis
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BANKING
“Redefining Banking”Digitalization is forcing banks to undergo the most extensive transformation in their history, says Holger Spielberg. Credit Suisse’s new “Head of Innovation” for its Digital Private Bank explains the financial revolution. Interview: Simon Brunner, Photo: Christian Grund
Mr. Spielberg, in an industry report, PwC writes the following: “Banks find themselves in the midst of a transition with the term ‘digital ’ at its core” ; in another report, McKinsey & Co. write: “Getting digital banking right is a matter of life and death.” Are we in the midst of the greatest revolution in the history of banking? That was a long question. The answer is much shorter: Yes, that’s right.
Why? Banks today are at a crossroads. On the one hand, they are still processing their recent history. On the other hand, we can already see the first effects of a digita-lization of society, an issue that banks are still struggling with. Bank branches are hardly needed any longer. Payments and money transfers can be handled by platforms and robots. These basic functions will be open and free, they do not necessarily require a bank. And soon, we will be able to pay our telephone bills using social media.
The retail business is under pressure.Yes, and the banks are in a bad position. The competition is closer to the clients and comes mostly from outside of the world of finance – Apple, Facebook, or Swisscom in Switzerland, which is making a strong push into finance. “Concrete steps into the future”: engineer Spielberg, 47.
Besides, regulations and data protection are less stringent than they are here. And, finally, the American banks are serving an enormous market, which is a very important aspect for digitaliza-tion since economies of scale are what count here. You don’t earn much for individual clients; you need high volumes to pay off the high development costs and expensive software solutions.
Is it also a question of mindset?Yes. The way I see it, US banks have fewer reservations about Silicon Valley, fintech ventures and technological innovations; we could learn something from them in that regard.
How is Credit Suisse responding to the digital challenge?By taking specific steps: In order to really change things, we are changing the way we work and approach the topic. This starts with our team, which we are augmenting with talented people from other industries, startups and with digital backgrounds. I’m also trying to set the tone, based on my 15 years of experience in Silicon Valley. We are transforming all of our activities to be more agile, and with our office layout we’ve put the business and developer teams together. We can point to the measurable, positive experiences
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Add to that the fact that “fintechs,” startup companies in the financial area, are springing up like mushrooms. Worldwide, around seven billion francs are being invested in these companies annually. We are seeing a lot of fintechs in the retail area right now, as well as increasingly exciting approaches in wealth management.
But isn’t the outlook in private banking better?In this area, we find ourselves in a rela-tively strong position – for now. This business is much more complex and the usually quite exclusive clients are less price-sensitive than in the retail business. Security, relevance, expertise and protection of the private realm are just as important. But here, too, there is a digital revolution.
One hears a lot about the “Digital Private Bank.” Until now, though, this has seldom meant more than graphically attractive portfolio analyses and access to the client’s own data using any device. Is that a revolution? First of all, yes, you are right that user interfaces and mobile access are truly the first things to have changed. But it was necessary. Our interaction with the digital world has undergone enormous changes in a very short time. No one was demand-ing a screen that could be manipulated by swiping back and forth, but once it was here, everyone thought it was cool. Inno-vations like this will continue to come. They aren’t specifically related to banking, but we are affected by them and have to do our part. Otherwise, we run the risk of becoming alienated from our clients.
Secondly?Banks have been forced to change their business model in recent years due to the financial crisis and more stringent regulatory requirements. In addition, there is a huge amount of pressure on the relationship of costs to revenue. It’s about achieving a whole new level of efficiency on the one hand, while also presenting new growth. The digital world offers an opportunity here, but many
European banks are still reacting too hesitantly. Visually augmented graphics are just a band-aid, but not a model for the future.
What will it take? That is the third part of the answer. I believe that we need to somewhat rethink banking, consistently with clients in mind. With all the buzz about fintechs, banks have the potential to establish themselves sustainably for the future. So we have to rethink our services from a push to a pull model. My vision is to see banking become integrated in the lives of our clients, with more relevance and a great deal of trust. For the banks, this means investing intelligently in new strategic competencies, such as partnering. If the banks really trust in themselves, they can be better than any start-up.
Why are American banks more advanced in this regard? For a long time the American banking system was very inefficient and was still functioning in part on a manual level – think checks, for example. There was extreme pressure to innovate, compounded by the fact that digitalization was much more advanced in other areas. In addition, the economic crisis hit earlier, and US banks were forced to cut costs, which is achieved through digitalization.
“Along the way you can also pay the bill”: Starbucks is the number two company when it comes to mobile payment.
Photo: Facundo Arrizabalaga / EPA / Keystone
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Digital banking gains in popularityShare of people using banking services via the internet or mobile phone in percentages (data for the US).
we’ve had with our “factory” in Singapore in this regard.
What’s ahead for the long term? Zurich and Silicon Valley will have innovation labs after 2020. There, we hope to create interfaces with other develop-ments in society, technology and research, as well as realize projects and prototypes for shaping our own banking future. These labs should also become sources of disrup-tive thinking and impulses, which will redefine banking and completely reconfig-ure processes and added value for clients in Wealth Management, for example. With the Digital Private Bank, we find ourselves at the beginning of the bank’s transformation. A number of other banks are currently also taking on digitalization for themselves. I am convinced that, in the long term, the banks that will be successful are not those that offer the coolest features right now. Rather, success must be measured by the bank’s ability to implement digital changes sensibly and efficiently on an organizational level.
What will the role of the client advisor be?In our philosophy, the client advisor will play an important personal role. But roles and tasks have to change in order to remain more relevant to the lives of our clients in the future. The fact is that we are not taking the right approach with the 30-year-old Google millionaires or the Millennials. A traditional “wine
and dine” approach is working less and less in this segment, where the advisor is seen as more of a coach. These clients want support in how to handle money in general, how to set financial goals and how to make them achievable.
Will Credit Suisse be on a first-name basis with its clients, addressing them using the informal “you”?We are a global company, so “you” is already just “you”! But that should ultimately be left up to the client. After all, using digital channels in addition to client advisors also creates a much more personal relation-ship with our clients.
Swiss banks stand for discretion. The digital world stands for the opposite: absolute openness. Isn’t that a contradiction?"Swissness” is a strong value established over centuries and which, at its core, remains a solid one. Especially these days when so much is “shared,” trust and security mean a lot. This is what the Swiss banks should build upon, redefining discretion in a digital world.
How?If I want to transfer money from one social media platform to another, as previously mentioned, the underlying platform must be able to guarantee data security. That could be a Swiss bank. The exciting thing is that digital also means direct person- to-person interaction. New technologies
Holger Spielberg, 47, is Head of Innovation for the Digital Private Bank at Credit Suisse. He previously held the position of Head of Mobile Payment and Retail Services at PayPal and worked at various startups and risk venture companies in Silicon Valley. Originally from Germany, he lives in Horgen and has one son.
can help here and represent an opportunity for Swiss banks with their tra-dition and international reputation.
Where is mobile payment actually ideal? Number one in mobile payment is my former employer PayPal, simply because a significant portion of e-commerce is conducted using mobile end devices and PayPal is innovative. Yet Starbucks is number two. They are not actually even involved in the mobile payment areas, but they have an app for ordering a latte, earning loyalty points or buying someone a coffee – and along the way you can also pay the bill. It works like Uber, where everything is integrated in a single app: ordering a taxi, displaying wait times, entering the destination, rating the driver – and paying, too, including a digital receipt which can be automatically saved in an expense report. The payment function is successful because it is embedded in the app. Really, why should I carry cash?
Does consumption rise along with the user-friendliness of electronic money? I’m not sure. Of course the transaction becomes easier, but you also have a higher degree of transparency and control. Household budgets are very well suited for digital solutions. There are more and more apps to connect various accounts and let you know how you stand compared to your budget. You receive an alert if you exceed a spending limit.
60 %
40 %
20 %
0 %
2000 20082004 20122002 20102006 2014
Source: Pew Research Center
18 %
18 %
61 %
online banking mobile banking
35 %
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Bartering Beats Buying
Offering
FLASHLIGHTAt Bambali, a German
online swap meet, goods can be bartered, and
traded for other goods or virtual coins. These coins
are also used to pay fees. Bambali was started
in 2004 and functions as an online flea market.
For example, user “Derendinger” from
Erding in Bavaria is offering a hand
powered flashlight from the 1950s. Price: “some
thing of similar value (12 euros) plus postage (4.10 euros) in stamps
in advance,” it says.
MuleThe Spanish site
Quierocambiarlo.com is a typical bartering plat
form with a wide array of offerings. Under
the category “bartering or giving animals,”
Pepe Jara from Madrid is offering a mule (spotted)
with a twoaxle cart (value: 999 euros). The
animal is described as being ideal for farm
ing, kids or therapy. Pepe is looking to trade
for a larger cart to be used with an Arabian horse of over 1.4 meters.
SAMSUNG GALAXY S4Even in the innovation center Silicon Valley,
bartering is a trend which has given rise to an
investment opportunity: The trade portal TradeYa! recently raised 1.1 million
US dollars in seed funding. The online portal (there is also an app)
offers a wide variety of consumer goods includ
ing refrigerators, game consoles and designer handbags.
If desired, trades can also take place on social
media. People offering goods and services
can also use Facebook postings or Twitter
links to search for someone who is willing to
make an offer, for example on a Samsung
Galaxy S4. The trade is completed when
someone offers something acceptable
in return.
OfferingFoot MassageThe bartering club Gib &
Nimm (Give & Take) in Dortmund, Germany, is
one of the pioneers of this method of trading.
It was founded in 1994 by Heidemarie Schwermer, who has since been
living without money or her own apartment for almost 20 years. Activities and tasks are traded
at Gib & Nimm, and the club sees itself as a
group of neighbors, with the internet playing only a minor role. Club
members, who pay a onetime membership fee of 15 euros, meet monthly
at the “neighborhood cafe,” where lists are posted with current
needs and offers. People offer to give foot mas
sages, provide computer support or water plants.
Others “take” help with moving, going to the
movies or ideas for a bicycle tour.
Seeking
GARDENERThe US organization Shared Earth calls
itself the largest community garden on the
planet. The idea: Landowners who do not
cultivate their properties are connected with
farmers and gardeners without land, such
as “Poniegirl” from Lapine, Alabama: She
owns 28 acres of land (roughly 113,000 m2), about half of which is
forested and is looking for someone to raise
goats and horses, grow grain or keep bees on
her land. Who does what or who gets what
is negotiable.
Back from the stone age: People are bartering around the world on the internet. Many of the bartering platforms are very localized, and there’s nothing you can’t find – or get rid of.
Compiled by: David Schnapp
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Mr. Bernanke, do you actually still carry cash in your wallet?Of course! However, I must admit that I only have US dollars on me today, although I’m here in the UK.
If we were to meet you in 20 years, would you still have bills and coins in your pocket, or more precisely: Will they even exist? Ask me something easier! People already like to pay electronically, even for small things like a Coke. Cash transactions will certainly continue to decrease. I suspect, however, that there will still be cash, but for a different reason. People like the anonymity of bank notes. About
two-thirds of all US dollars are currently outside of the country. I assume that a large portion of them are used for the private custody of assets.
Like hiding money under the mattress?Exactly, or burying it in the backyard. In many areas of the world, people don’t trust their governments. They invest their assets in US dollars and store the money themselves. The amount of US dollars abroad has increased even more in recent years.
What will be the base currency in 20 years?It will still be the US dollar. Of course, the
Chinese renminbi will gain in importance globally, but I see no other currency that could pressure the dollar when it comes to international payments.
What role will banks play?The fundamental functions of banks, lending and payment transactions, have been around for hundreds of years and will continue to be needed. However, the system will become increas-ingly decentralized.
Finally, what was the first thing you did to make money? I grew up in Dillon, a small town in South Carolina. My father had a drug store there, and I worked for him once in a while. He paid me 25 cents an hour. I had to dust shelves and unpack boxes. My first real job was after high school working in construc-tion. I had to cart around cement and haul bricks. I earned 1.75 dollars an hour and, as a bonus, I was in great shape by the end of the summer.
OUTLOOK
“There is no currency pressuring the dollar”
Ben Bernanke, 61, served as chairman of the United States Federal Reserve from 2006 until 2014. He spoke at the Credit Suisse Salon in London in October 2014.
Former Federal Reserve Chairman Ben Bernanke looks ahead. Will there still be cash in the future? What will the base currency be? What role will banks play? Interview: Daniel Huber
Photo: Nicholas Kamm/AFP Photo
The SS Central America sank off the Florida coast in 1857 with 21,000 kilograms of gold on board. Current value:
around one billion dollars. The wreck was located in 1988, but the discovery ended in a chaotic legal battle. This has
finally been settled and the biggest treasure of all time is being recovered using high-tech methods.
By Lars Jensen
Hunters of the Lost
Treasure
— Money —
50 — Bulletin 1 / 2015 Photo: Odyssey Marine Exploration, Inc.
Precious Metal from the Deep In 2014, around 100 gold bars, 3,000 gold coins includ-ing 1,700 valuable $20 Double Eagle gold coins, 20,000 silver coins, two toilets, a saddlebag, 42 framed photographs, six revolvers and one pair of cotton trousers were recovered from a depth of more than two kilometers.
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Bulletin 1 / 2015 — 51
52 — Bulletin 1 / 2015
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and I am her voice and protector. Searching for and finding a treasure is a childhood dream. What could be better than realizing a childhood dream?”
The last salvage run to the floor of the Atlantic for 2014 took place in September. The booty recovered this last year consists of around 100 gold bars, 3,000 gold coins, including 1,700 valuable $20 Double Eagle gold coins, 20,000 silver coins, two toilets, a saddlebag, 42 framed photographs, six re-volvers and one pair of cotton trousers. All told it is expected to fetch at least 85 million dollars at auction. “We have recovered around five percent of the treasure so far.” The expedition has also discovered two pre-viously unknown types of sea anemones. And Evans claims: “We will bring even more gold to the surface using our new technologies,” bringing the audience of col-lectors and speculators to their feet, cheer-ing. “We will keep going in 2015.”
Like a Pirate MovieWhat he doesn’t tell his audience about is the dark side of his life as a treasure hunter. As he’s learned over the past three decades, “Life is like a pirate movie – when you find a shipwreck full of gold, your problems are just beginning.”
For example, there was his former neighbor, friend and partner who convinced him to launch the first expedition. As it turns out, Tommy Thompson is a con man who swindled investors, employees and
cientist Bob Evans looks exactly like you would picture a man who is spend-ing his life raising a treasure, a ship’s cargo of gold and silver from the ocean floor near South Carolina at a depth of 2,300 meters. Evans has shoulder-length gray hair topped by a white Indiana Jones hat and a trimmed beard. He stands behind a podium, speak-ing as a guest of honor at a numismatic con-ference in San Diego. He has been invited regularly to such events since he and his team of adventurers and scientists discov-ered the wreck of the SS [Sidewheel Steamer] Central America – also known as the “Ship of Gold” – on September 12, 1988.
For speculators and collectors of valu-able coins, this date is as significant as the Big Bang, the start of a new era. Adam Crum, president of the world’s most im-portant coin dealing company, Monaco Rare Coins, says, “The Central America, with its perfectly preserved coins, redefined our industry.” When the steamer sank on September 12, 1857, it took down with it not only more than 400 people, but also a treasure of gold so valuable that its disap-pearance triggered one of the first global economic crises, the Panic of 1857.
In 27 years, Evans and his helpers have recovered thousands of coins, bars and sacks of gold dust valued at 100 to 400 mil-lion dollars, depending on the estimate. “I’m 61 years old now,” Evans tells the audi-ence. “I’ve been working on this project for 32 years. The Central America is my life,
S auction houses. Thompson failed to appear in court two years ago. Now the FBI is look-ing for him: Thompson disappeared with 500 gold coins and several million dollars.
Eight Million for One BarThen there were the insurance companies, 39 in all, who demanded the profits after the first coin auctions. They argued that they reimbursed the gold’s owners after the ship sank, which guaranteed their right to the gold 130 years later. A single gold bar, the famous “Eureka” bar, fetched eight mil-lion dollars at Christie’s auction house; in-dividual coins went for six-figure sums.
These numbers attracted the atten-tion of the insurance companies. Lawyers carried on the lawsuit for 16 long years, which blocked the project upfront and even made it to the Supreme Court. Finally a compromise was reached: The insurance and salvage companies would divide the profits according to a complicated for-mula. The finders of the treasure receive 92.2 percent.
But first and foremost there were the technical problems. In 1986, Tommy Thompson outfitted an icebreaker with radar and sonar and developed a primitive remote-controlled submarine. This equip-ment was sufficient to locate the Central America and retrieve the part of the gold that was easy to access from the wreck. But it took almost 30 years for technology to mature to the point where treasure
Photo: Courtesy of Recovery Limited Partnership
Bulletin 1 / 2015 — 53
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Around the Clock 42 scientists and technicians work around the clock on board the Odyssey Explorer. Ship owner Omex is the global market leader for deep-water projects.
Human and Machine Sophisticated machines do the work on board the Odyssey Explorer and on the ocean floor – people don’t come into contact with the treasure.
Zeus, the Treasure HunterThe eight-ton robot Zeus is the actual treasure hunter. The sophisticated submarine diving equipment is steered by joystick and does the work on the ocean floor.
Photos: Courtesy of Recovery Limited Partnership; Odyssey Marine Exploration, Inc.
54 — Bulletin 1 / 2015
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ogy that makes these projects possible. You have to imagine the Odyssey Explorer as a floating supercomputer with a galley and archaeological labs. The team works in shifts around the clock. Every activity on board, every step crew members take is reg-istered by cameras and motion detectors.
A Robot Named ZeusTwenty-first-century treasure hunters don’t come in contact with the treasure. Ma-chines do the work; Evans and Mullen, Craig and Tapanes stand in front of moni-tor walls and direct young men who use joy-sticks to steer an eight-ton robot named
hunters can dig for gold coins in the silt at a depth of more than two kilometers. “Now we can combine experience with modern technology,” says Evans.
After Thompson disappeared in 2012 and his company, Columbus America Dis-covery Group, went bankrupt, the court named attorney Ira Kane as a trustee to complete Thompson’s work. After all, histo-rians estimate that the Central America holds a treasure that could be worth up to one billion dollars today. The over one hun-dred investors who financed Thompson’s work with 55 million dollars back in the 1980s are still waiting for their money and liked the idea of recovering the entire trea-sure with new expeditions.
Floating SupercomputerThe contract was awarded to a company from Tampa, Florida, in early 2014: Odys-sey Marine Exploration (Omex), listed on the NASDAQ and the global market leader for projects in the ocean’s depths. Omex re-covers airplane crashes in the Indian Ocean, lays cable through the Pacific, mines for phosphate in the Caribbean and searches for treasure in the Atlantic. The company gained experience with the SS Republic (2003) and the SS Gairsoppa (2011), which carried less valuable cargo but were in deeper waters than Thompson and Evans’ boat. Omex was able to salvage 51,000 sil-ver coins from the wreck of the Republic and 110 tons of silver from the Gairsoppa at a depth of five kilometers. “When we decide to search for treasure, it’s always a crapshoot,” says Roy Truman, Director of Marine Operations at Omex. “But thus far we’ve always seen very satisfactory results.”
Forty-two scientists and technicians were on board on April 15, 2014, when the Odyssey Explorer left Charleston harbor for the first time that year. Evans’ title is Chief Scientist and Historian; his longtime colleague Craig T. Mullen is Director of Operations. They were on board represent-ing the trustee and had to bring back the first day’s finds by helicopter to a judge in Virginia. He would only grant a new ap-proval to salvage the shipwreck if he recog-nized the benefits of the activity. The gold coins and photographs convinced him.
Omex employees Andrew Craig and Ernie Tapanes were also on board the Od-yssey Explorer. In the deep-water ship-wreck recovery business, these two are as well-known as Ronaldo and Messi in the soccer world. They developed the technol-
Bob EvansThe Chief Scientist in charge of the treasure hunt has devoted himself to the Central America’s treasure for almost thirty years. Technology has finally matured to the point that treasure hunters can dig for gold coins in the silt on the ocean floor. Evans was convinced to go treasure hunting by his former neighbor and friend, Tommy Thompson.
Tommy ThompsonThe shady businessman and bril-liant treasure hunter located the Central America in 1986 with a primitive remote-controlled sub-marine. Thompson’s company went bankrupt in 2012, cheating more than one hundred investors. Thompson himself has since disappeared and is wanted by the FBI.
Craig T. MullenBob Evans’ long-time colleague is Director of Operations for the Central America. From the control room, Mullen directs the search robots and works in the lab on the treasure hunting ship, where he decides what should happen to salvaged items.
Extreme PrecisionZeus, the salvage robot, works with the greatest precision. Its arms can operate with the same exactitude as a cardiac surgeon to lift porcelain or glass undam-aged. It is guided from the online room where all underwater activities are monitored.
Supercomputer at SeaRonaldo and Messi of the deep sea: Ernie Tapanes and Andrew Craig developed the technology for expeditions in the ocean’s depths. The Odyssey Explorer is a kind of floating supercom-puter with a galley.
THE TREASURE HUNTERS
Photos: Tessa Berg / Columbus Monthly; Lon Horwedel / The Columbus Dispatch /AP Photo / Keystone; Odyssey Marine Exploration, Inc. (3)
Bulletin 1 / 2015 — 55
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Zeus. In April it produced 12,500 ra-zor-sharp photographic images of a debris field the size of 15 soccer fields. The com-puter uses these photos to create a three-di-mensional map of the ocean floor, which guides the robot in its work and marks every unnatural material in this area.
Zeus has arms that can grasp with as much force as a shark’s jaws and yet work with the precision of a cardiac surgeon. It has a trunk that can suck and blow, which helps it collect breakable items like porcelain and glass. After 150 years on the ocean floor, or-ganic material – wood, fabric, bone – has be-come a paste-like mass. Even metals must be handled with the greatest care.
For example, when Zeus finds a safe with gold bars, it transports the whole thing to the ship and places it in a water tank. A crane then lifts the tank on board the Od-yssey Explorer. Evans and Mullen decide in the lab whether the safe should be opened immediately or after they return to land. Sometimes curiosity makes the waiting
nearly unbearable. “I would be a poor trea-sure hunter if I weren’t curious,” says Mul-len. “But sometimes it’s too risky to open a safe. After all, it could contain papers that would disintegrate immediately after com-ing into contact with the new environment. We’re also interested in historic artifacts, not just precious metals.”
Coins in Unparalleled Good ConditionTo avoid legal chaos like after the first expe-dition in 1988, everyone involved needs to follow a strict protocol. Zeus registers every item, and then a digital file is created that contains all information on it and recom-mendations for further treatment and han-dling. No employee is ever alone in the “coin room” where the valuables are stored. The archaeologists must pedantically en-sure that all the items are always submerged in containers of water: The coins from the Central America are so coveted in part be-cause they are in unparalleled good condi-tion. A single second of exposure to air
could be enough to change the surface of a coin so much that it loses its value. Evans works in a special laboratory in Charleston using a secret process to prepare the coins for sale.
The Gold RushThe discovery of gold in California led to ships like the SS Central America traveling 19th-century seas with hoards of precious metal on board. When a worker spotted a shimmering yellow nugget in a creek at the New Helvetica Ranch owned by Swiss pio-neer Johannes Sutter in January 1848, he had no idea that his discovery would shape America’s history. A local schoolteacher as-sured Sutter that this was a chunk of gold. Sutter forbade lumberjacks in his forest to talk about the discovery. But they couldn’t keep quiet. By summertime of that same year, thousands of gold seekers swarmed to Northern California – and many of them got rich within weeks. The exclamation “Eureka!” – “I found it” – became
Photo: Courtesy of Recovery Limited Partnership
56 — Bulletin 1 / 2015
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California’s motto. The Gold Rush began when President Polk announced that fall that huge quantities of fine-quality gold had been found in California.
Most of the nouveau riche specula-tors chose the sea route to transport the pre-cious metal to Philadelphia or New York, where the two United States mints were lo-cated. Ships departed from San Francisco to Panama. Those who survived the march through the jungle boarded another ship on the Caribbean side of Panama headed for the Northeast – with a stopover in Havana, where many spent part of their wealth on gambling and drinking.
The SS Central America was one of the most modern and comfortable ships to sail between Panama and New York on be-half of the government, and its Captain, William Herndon, was called one of the “best captains of his time” in an obituary in the New York Times. On September 3, 1857, the steamship departed from Aspin-wall (today Colón, Panama) with 450 pas-sengers and 128 crew members. On board
Crisis and WarNews of the Central America’s demise unleashed panic in the stock market. The Panic of 1857 followed, now consid-ered a cause of the Civil War in 1861 (photo, top: Wall Street, 1857).
was an official gold shipment valued at 1.6 million dollars and weighing two tons. In addition to that were sacks full of nug-gets, gold dust and bars that passengers had collected in the forests of northern Califor-nia and were personally transporting.
Dismay at the Stock MarketWhat makes the cargo so spectacular from today’s perspective is that the Federal Re-serve had opened a mint in San Fran-
Photos: James H. Cafferty and Charles J. Rosenberg, illustration: Ullstein Bild / Granger NYC; National Maritime Museum, Greenwich, London
Bulletin 1 / 2015 — 57
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58 — Bulletin 1 / 2015
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SEVEN OF THE MOST VALUABLE TREASURES THAT HAVE NEVER BEEN FOUND
Legend of the Golden CityThe fabulous wealth of a golden country (“El Dorado”) in northern South America fed the imaginations of Spanish conquerors in the 16th century. According to legend, each new ruler of the Muisca offered golden sacrifices to the bottom of a lake. New reports of the location and type of trea-sure, which is estimated at up to 10 billion dollars, emerged time and again. Alexander von Humboldt declared it a myth in 1800.
The Lost Fabergé EggsIn 1885, the Russian Czar Alexander III commissioned the production of golden eggs as a gift for his wife, Maria. Goldsmith Peter Carl Fabergé created a total of 76 eggs. Many of the fili-greed artworks were confis-cated after the Revolution in 1917, but eight remain lost (valued at up to 150 million dollars).
King John’s Lost TreasureOn October 10, 1216, En-gland’s King John, also known as King John Lack-land, was traveling to the east coast of England. He had his entire treasure including the crown jewels with him in a wagon train. Traveling in the fog, the wagons sank in quicksand at the estuary of four rivers (The Wash). Precious valu-ables worth around 70 million dollars were suppos-edly lost. But what actually happened in the fog on that journey, and what was lost, is the subject of historical speculation to this day.
The Amber Room of BerlinThe room gilded with amber, mirrors and gold leaf was originally commissioned by Prussian King Friedrich I for the Berlin Stadtschloss Palace. It was given to Czar Peter the Great in 1716, and has been lost since the end of the Second World War. A replica was rebuilt in St. Petersburg’s Catherine Palace in 2003. The origi-nal’s value is estimated at between 130 and 250 million euros.
The Treasure of the Knights TemplarThe Order of the Knights Templar (1118 to 1312) amassed impressive amounts of land, gold and other wealth during the approximately 200 years of its existence. King Philipp IV of France and Pope Clemens V began arresting the Knights in 1307. How-ever, many of the Knights supposedly escaped from La Rochelle with 18 ships. Their whereabouts remain as much a mystery as the location of the treasure.
Paul Kruger’s MillionsAs British troops were clos-ing in on the South African capital of Pretoria during the second Boer War (1899–1902), the ruling Boers attempted to spirit away as much gold from the government reserves as possible. President Paul Kruger took the treasure with him. He boarded a ship to France on October 19, 1900. The gold supposedly disappeared somewhere in the Bush. According to questionable sources, the Kruger treasure was discovered in 2001 near Ermelo on the northeastern coast of South Africa.
The Copper Scrolls from the Dead SeaBetween 1947 and 1956, around 15,000 fragments of approximately 850 ancient Judaic scrolls were discov-ered in eleven caves on the West Bank near the Dead Sea. Two items stood out from the find: two heavily oxidized copper scrolls that contain a list of 64 locations where gold and silver worth more than 1.2 billion dollars are hidden. The Romans might have plundered many of the treasures, while others may never be found.
Photo: Scherl / Süddeutsche Zeitung Photo / Keystone
Bulletin 1 / 2015 — 59
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He may have been a rogue as a business-man, but he was a genius as a treasure hunter. Even the investors he conned will confirm that: “Thompson is brilliant,” in-surance broker Donald Garlikov told Forbes Magazine. “I invested 200,000 dol-lars and would give it to him again any time. We all assumed that he would never find the ship. But he did it – it was a master feat.”
Thompson put together a team that included Bob Evans. “We had fantastic ideas; we wanted to revolutionize treasure hunting.” With the help of mathemati-cians, Thompson first calculated the possi-ble resting place of the Central America. In 1987 he cruised the Atlantic in his Arctic Discoverer for forty days, submerging a small robot to a depth of 1,500 meters and searching the ocean floor with sonar. Ini-tially the team concentrated on a wreck lo-cated further south. Evans was the one who pushed to investigate a second shipwreck. Without Evans’ gut feeling, the right boat might never have been found. In Septem-ber 1988, the crew recovered the ship’s bell from the Central America and clearly iden-tified the ship.
The latest images of the wreck are from the Odyssey Explorer’s last expedition in November 2014. The ship’s ribs jut up-ward from the ocean floor and its sides are tipped symmetrically outwards on every
cisco at the height of the Gold Rush, which had been producing especially high-quality coins since 1856. Crates of the freshly minted “1857-S $20 Double Eagles” were stacked in the ship’s hold. Coin expert Adam Crum says, “This cargo is compara-ble to someone finding an attic containing a hundred perfectly preserved Van Goghs.”
After stopping in Havana, where pas-sengers stocked up on cigars and rum, the journey continued on September 7. The hurricane hit the Central America shortly thereafter as it passed the Florida coast. The four-story ship battled for 36 hours against waves as high as a house and brutal squalls. Finally the cargo came loose and a particu-larly heavy chest punched a hole in the hull of the ship. A sailing ship that was also in distress and floating nearby was able to res-cue 153 people; 425 souls were lost at sea.
News of the Central America’s de-mise unleashed dismay on the New York Stock Exchange. Not just for the many victims, but also because banks were de-pending heavily on the new gold ship-ment. During the Gold Rush, many insti-tutions handed out loans rather recklessly. When a recession loomed due to poor har-vests in the summer of 1857, many cus-tomers had to withdraw their savings from banks, forcing financial institutions to tap into their gold reserves. But what could
they do when there wasn’t enough to cover all of their debts?
In September 1857 the Ohio Life In-surance company, one of the biggest debtors to New York banks, closed its office in the city. When the Central America sank a few days later, bankers panicked and liquidated their stocks – triggering a global economic crisis that is now considered one of the causes of the Civil War in 1861.
The Genius Among the Treasure HuntersThe Central America landed keel-down at a depth of 2,300 meters, 240 kilometers east of Charleston, South Carolina. Complete and utter darkness reigns at this depth and even the strongest hurricanes are imperceptible. The victims were consumed by bacteria and amoebas, not fish. Even months after the ca-tastrophe, the New York Times published detailed eyewitness accounts. But soon the threat of war took over the headlines and when peace returned in 1865, Americans had set aside the memory of the worst maritime disaster in the country’s history.
That is, until 1981, when an engineer named Tommy Thompson started to rum-mage through old archives in Columbus, Ohio, to locate valuable shipwrecks.
Thompson was known for wearing Hawaiian shirts and Bermuda shorts with black leather shoes and knee-high socks.
Debris Field in 3DBefore salvage operations could begin, Zeus took 12,500 razor-sharp photographic images of the ocean floor and used them to calculate a precise 3D map which allows the robot to orient itself underwater.
Havana
Panama
New York
The Central America sank in a hurricane off the Florida coast on September 12, 1857.
Photo: Odyssey Marine Exploration, Inc. for Recovery Limited Partnership
60 — Bulletin 1 / 2015
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side. From above it looks like a rotted but-terfly. Although no current can be measured so deep underwater, the ship’s debris and contents have been distributed widely. Zeus discovered a gold coin ninety meters away from the shipwreck.
How Much Gold Was Really on Board?But the true purpose of the latest investiga-tions is not to find individual coins. Rather, Evans and Mullen, Craig and Tapanes want to finally answer the question that has been inspiring new legends for 30 years now: How much gold was really on board the Central America?
Back in 1857 the rumor went around that the ship was secretly transporting twenty tons of gold for the military. The New York Times speculated at that time: “The Central America was the only ship off the East Coast that did not survive this storm. Because it was overloaded? Because a safe weighing several tons punched a hole in the hull?”
The Last TreasureIn fact, the steamship had survived heavier storms in its 44 trips between Panama and New York. Tommy Thompson claims to have found evidence of the secret gold – in the archives of the US Navy. However, Thompson’s credibility is questionable at best. The military is keeping quiet on these speculations. Meanwhile, it seems increas-ingly unlikely that Evans and Omex will find a secret gold treasure. “Regardless of that, further expeditions are certainly worthwhile,” says Evans. “Cautious esti-mates hold that at least 10,000 Gold Eagles are still down there. If we only salvage half of them, that’s at least fifty million dollars.”
Evans, Mullen and the team from Omex will continue to focus on the SS Cen-tral America for another reason as well. It is perhaps the last treasure that will ever have permission to be salvaged from the ocean floor for commercial purposes. Treasure hunters have been battling governments over sunken ships for decades. Spanish gold in the Caribbean, Nazi gold off of Green-land, English gold in the Indian Ocean. Time and again, the conflict flares over whether shipwrecks with valuable cargoes are national cultural property or whether the rule applies: Finders, keepers.
Shipwrecks Are Now Mass GravesUNESCO, the United Nations Educa-tional, Scientific and Cultural Organiza-tion, has now issued a decree. In the future, shipwrecks will be considered mass graves and can only be touched if a cultural interest exists. Finds cannot be sold individually, and instead must be preserved as a whole. Omex’s stock values plummeted after UNESCO’s announcement.
As soon as weather permits in spring 2015, Bob Evans will once again set forth from Charleston with the Odyssey Ex-plorer and Zeus will collect gold coins from the ocean floor. If the wreck of the Central America should ever be plundered, Evans has an idea of what he would like to look for next, It would be very interesting to find out where his former partner Tommy Thomp-son is hiding.
Lars Jensen lives in New York and writes for the Frankfurter Allgemeine Zeitung, Die Zeit, the Süddeutsche Zeitung, Spiegel and other publications.
A Gold Bar for HistoryIn 1981, engineer Tommy Thompson rummaged through archives and found documents about the Central America. With mathematicians he calcu-lated the ship’s location and searched for the wreck in the Atlantic in 1987. The “Eureka” gold bar that he was able to retrieve (photo above) fetched eight million dollars at auction.
Photo: Paul Gilkes, courtesy of Coin World
Bulletin 1 / 2015 — 61
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Is Money Bad for Your Character?Research tells us that it is important for children to take on financial responsibilities; one franc in weekly pocket money per school grade is enough; and shopping makes us happy – even when we don’t buy anything.By Urs Willmann
without it,” says Moritz Daum, a develop-mental psychologist in Zurich. But han-dling money involves certain risks. From a parenting perspective, money is not very different from drugs (prescription or other-wise), cars, electronics or kitchen appli-ances. Any of them may be dangerous when not used properly.
The danger of money lies in its imme-diate and often irresistible appeal. Money can have incredibly varied effects: It can lift your spirits, or it can make you nervous and hyperactive. It can also trigger envy.
the guinea pigs, clean their cages, breed some and sell others, then put some of my earnings back into food for the guinea pigs. Eventually I earned a profit. My hourly wage amounted to roughly 10 centimes.
The Role of MoneyMore importantly, I learned the basics of managing money. As the German Youth Institute has pointed out, pocket money is also a good way of teaching children, over time, how to handle money. Education in-cludes learning about money. “You can’t live
I have no regrets. I earned one franc for a young guinea pig, two if it was full-grown. The baker from the next village stopped by periodically to buy guinea pigs from me, which he then sold to another buyer. And I knew who that was – more or less.
No, I don’t regret that when I was eight years old, I earned some extra money and learned the same lessons experts rec-ommend teaching to children today. Whether they are rich or poor, children need to learn that money doesn’t grow on trees. You have to work for it. I had to feed
Children and capital: Learning to handle money is part of education.
Photo: Tim Platt / Getty Images
62 — Bulletin 1 / 2015
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dling money issues, recommends, as a rule of thumb, one franc per school grade per week. In other words, a fourth grader would receive four francs every week. Later on, pocket money should be paid out monthly, with the amount increasing to between 50 and 80 francs by the 11th grade.
Children who are responsible for their own purchases think twice before buying expensive brand-name goods, says Daum. Responsibility teaches them to be careful. “They take better care of their bicy-cles and are less likely to lose books. They keep their mobile phones in working order longer, buy a second-hand snowboard rather than a new one, and come to appre-ciate a sandwich from home.”
This perspective is in keeping with “Jugendlohn,” literally “wages for young people,” an idea that is currently the subject of much discussion. Family therapist Urs Abt developed this model in the 1970s, and it is endorsed by many debt-prevention agencies. “Jugendlohn” is more than pocket
money. The idea is that beginning at roughly the age of 12, children should be given a fixed amount that they are expected to manage and use to cover some of their basic expenses: clothing, haircuts, bicycle, mobile phone, sports. They also receive a certain amount to spend on optional items.
This allows them to go shopping with friends, for example – a social activity that makes people happy, as neuroscientists have shown. It is important to note, how-ever, that the brain produces pleasure hor-mones primarily when anticipating a pur-chase. Researchers at Brunel University in the UK have found that dopamine – a plea-sure hormone – is released even when peo-ple are window shopping. So while the amount of money that is available has an effect on someone’s ability to make pur-
chases, it doesn’t necessarily have an impact on happiness.
Since Paracelsus, we have known that it is the dose that makes the poison. In the case of money, also a psychotropic drug, the situation is more complicated. According to Austrian economist Matthias Sutter, it is important to turn strategies into a routine. His “experimental economic research” has confirmed that educational measures have long-term benefits. University students who kept an account of their finances over a period of several months spent less money than their peers. What’s more, they contin-ued to save even after that period. Sutter’s conclusion: Discipline can be learned.
Discipline, ultimately, is what deter-mines whether money ruins a person’s char-acter or not – and this is true no matter how wealthy the parents are. “Even rich kids need to stay in touch with reality,” says de-velopmental psychologist Daum. If they succeed in doing that, they will not be spoiled by money.
Poverty Is More Harmful than WealthWhether or not a lot of money is basically good for children is hard to say. Wealthy people can save, too. However, empirical evidence shows that poverty is more likely than wealth to be harmful. In 2012, a study in the United States found that low paren-tal income when children are young is asso-ciated with worse health later on. As young adults, study participants were more likely to develop high blood pressure and arthri-tis. Studies showed deficits in their cogni-tive development as a result of childhood poverty. Daum also points out that severely socially disadvantaged children often have a much smaller vocabulary than children who are not disadvantaged.
A longitudinal study of 2,300 women revealed that the poorest mothers were most likely to show symptoms of anxiety disorder. They were plagued by worry, in-somnia and restlessness. The study’s direc-tor, psychiatrist Judith Baer from Rutgers University in New Jersey, believes that such anxiety disorders are “a reaction to severe environmental deficits.”
Daum also believes that children are adversely affected when their parents are constantly worried about finding the
Because of its seductive power and poten-tial for addiction, it can ruin a person’s char-acter, if measured out inappropriately. At least that’s what people say.
Daum, a professor in the Psychology Department at the University of Zurich, doesn’t believe that money in itself has a negative effect on character. However, he also points out that money is “so abstract” that it is difficult for young children to com-prehend. He therefore recommends gradu-ally allowing children to use money, starting at an early age. They should be given pocket money for which they are responsible. This teaches them that money doesn’t grow on trees, and that it shouldn’t be left lying around. They also learn that money can sat-isfy needs – but that you can’t get what you want until you’re able to pay for it.
Pocket Money as a Tool for LearningUnlike the play money used in a game like Monopoly, pocket money is an effective way to teach children about money at dif-ferent stages of their development. They learn, for example, that there are tangible consequences when money runs out before the end of the month. The German sociol-ogist Christine Feil, author of several books about the commercialization of childhood, says that pocket money should not be viewed as compensation for work, or char-ity, but rather as a resource that the child can use independently, without parental control.
Authority figures can provide guid-ance, however. They determine the amount – and the amount helps the child learn about value. “You should talk to adolescents about the cost of living,” says Daum. “Talk to them about rent, car expenses, the cost of food, insurance and taxes, as well as about things they may have wanted for a long time, but can’t afford to buy.” As he points out, “If young people are not taught about the actual costs of living, then they will dream of staying in hotels, earning execu-tive salaries and winning the lottery. They will focus, unrealistically, on the things they would like to buy.”
How much pocket money children need depends on where they live and their culture. Budgetberatung Schweiz, a Swiss organization that provides advice on han-
There are tangible consequences when money runs out before the end of the month.
Bulletin 1 / 2015 — 63
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entrepreneurOpportunities and Challenges in the Low Interest Rate Environment
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2015
Still in Peak Condition at 170A conversation about the innovative approach to crises at Fischer Reinach AG — page 4
Outlook for 2015Faster growth in exports, and low interest rates in Switzerland — page 10
New PerspectivesClient advisor Peter Zimmerli discusses how to obtain maximum bene t from the interest rate environment — page 14
“entrepreneur,” the magazine for decision-makers.
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People, Ideas and Goods in MotionOn the Move
Th e world’s oldest banking magazine – since Th e world’s oldest banking magazine – since Th 1895. Th eTh eTh world’s oldest banking oldest banking oldest magazine banking magazine banking – since 1895.
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And: Credit Suisse Credit Suisse Credit Worry Barometer Worry Barometer Worry – Barometer – Barometer the – the – Major Study Major Study Major on Study on Study the State of the of the of Nation25 Questions about Switzerland about Switzerland about
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64 — Bulletin 1 / 2015
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money to cover their day-to-day ex-penses: “In that respect, poverty can re-duce the amount of attention parents are able to give their children. And the par-ents’ worries can also be transmitted to their children.”
Can a wealthy family environment have negative effects, too? More research has been done on poverty than on wealth, says Daum. But of course there are (less common) cases of extremely wealthy families spoiling their children through excess. When children are aware that they have everything, it is difficult for them to dream. The bottom line is that those who have everything stop striving for success. “But the experience of being a worker among workers is something that privileged children need as well,” says Daum. “It is something they yearn for.”
A 13-Year-Old with DebtsMy flourishing guinea pig business didn’t make me rich. And when I turned 13 I started to accumulate debts – I wanted a social life. But I seem to have had some inkling that debts aren’t fun-damentally a bad thing – after all, they stimulate the economy. So I didn’t worry too much, but I didn’t overdo it, either.
Running a guinea pig business taught me that you can earn money if you do real work. However, my early fi-nancial education wasn’t necessarily beneficial to the little creatures in my care. The baker from the next village sold my guinea pigs to the pharmaceuti-cal industry, and they ended up in test laboratories.
But at least my heartlessness as a young boy helped me to become a re-sponsible capitalist.
“Generosity is part of love” Psychoanalyst and author Peter Schneider discusses the role money plays in relationships – and why couples find it so hard to talk about it.By Beatrice Schlag
Why is money often a central issue in relationships?Money and love are closely connected. That’s clear from the fact that people like to give each other gifts. Sometimes they can afford it, sometimes they can’t. But money plays a particularly important role when couples separate or divorce; it becomes a focus of conflict. Since you can’t force someone to love you, people fight about money instead.
Divorce attorneys tell stories of men who, long before any separation, hide away their assets in case of a divorce.That reveals something else: The man stashes away his money because he no longer feels loved. He is withdrawing
from the relationship in every respect. It’s financial fraud, obviously. But no one hides his money if he’s happy with his partner.
Can a love relationship work if one partner is generous and the other tends to be stingy?One option is for them to keep their finances separate. But that makes even simple things, like going out to dinner or taking a trip together, very challenging.
Are separate accounts a solution?Generosity, also in financial matters, is part of love. When it is one-sided, problems arise. People like to act as if money were just money, with no further significance, but in fact it expresses more than that in a rela-tionship.
“Money and love are closely connected,” says psychoanalyst Schneider.
Urs Willmann is a science journalist for the newspaper Die Zeit.
Photo: Rennie Solis / Trunk Archive
Bulletin 1 / 2015 — 65
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Many couples find it easier to talk about sex than their income. What is it about money that makes it such an intimate topic?We would like money to be simply a means to an end – rather than something that touches us to the core. When money reaches into our intimate relationships, it contaminates intimacy. It turns sex into prostitution. That is one side of the story. The other is this: It is precisely when we are determined to keep something out that it forces itself in. Cleanliness is inconceivable without dirt. Over and over again, money becomes a factor in intimate relationships.
How should a woman respond if her husband refuses to discuss his income?Even if he earns enough for both of them and she has no need to worry about exactly how much he makes, he is demonstrating a lack of trust. That isn’t good for an intimate relationship.
Surveys have shown that money is a much bigger problem for younger couples than for older ones.That makes sense, since older couples tend to have more money. And money helps to smooth over life’s difficulties. The more money you have, the less attention you have to pay to it.
How should a man respond if an attractive woman lets him know that she’s interested not only in him as a person, but also in his money?He may feel great. The big mistake is to believe that money is only a superficial factor. It is absurd to think that you might be loved only for yourself. If you eliminate your external qualities, such as physical appearance, bearing, status and money – what is left? People are loved for the sum total of what they have to offer. Money isn’t necessarily part of it. But you shouldn’t be upset if money is part of what makes you attractive. We delude ourselves today that we can experience intense emotions without any financial consequences.
Where does that delusion come from?Children are taught that a homemade gift is more valuable than something that is purchased. But they all know that a
Peter Schneider, 57, is a psychoanalyst, university lecturer, columnist and author.
homemade gift is not what they themselves want. And it’s rarely what they receive.
How generous should you be?Of course, you shouldn’t spend beyond your means too often, or exceed your resources by too much. But extravagance is part of love. In literature, the most magnificent kind of love is also the most ruinous. Over the long term, such relationships are unrealistic. But an occa-sional touch of impracticality can have a very positive effect on a loving relation - ship. Most people are happier to receive an impractical gift than a pocket calculator – although this may not apply to obsessive types who get a thrill out of reading their bank statements.
Happiness researchers have found that beyond a certain monthly income, a substan-tial increase in salary doesn’t make couples happier.I am living proof that the theory that money doesn’t bring happiness doesn’t always hold true. Ten years ago, I was earning about 10,000 francs per month. I now have considerably more work and earn more than twice as much. My wife and I are much happier, and money certainly has something to do with it. Money makes relationships less stressful and more enjoyable.
So does money make people happy, after all?Of course. Money makes countless things possible that bring happiness. People are happy when they can go out for a special dinner and treat their friends. They’re happy when they’re able to buy nice things. I don’t define myself in terms of such purchases, and I find it excruciatingly boring to spend an entire evening talking about them. But you can’t tell me that they don’t make life more enjoyable.
Compiled by Anja Hochberg, Chief Investment Officer for Europe & Switzer-land, Credit Suisse.
Sources: 1 Credit Suisse study, Switzerland, 2013; 2 Prudential, USA, 2013; 3 Pruden-tial, USA, 2014; 4 Emily Haisley/Barclays Wealth, Financial Times, 2013; 5 David Jones, Financial Times, 2013
He’s a Risk Taker, She’s a SaverHow do men and women handle money? A variety of studies have come to the same conclusions:
27 percent of women and 15 percent of men choose invest-ment strategies with low returns and a fairly low level of risk. 1
Purely stock-based portfolios or strategies that emphasize stocks are the choice of 55 percent of men , relative to roughly 36 percent of women . 1
Seventy percent of women describe themselves as “savers” rather than “investors,” this is true of 60 percent of men . 2
Increasing numbers of married women are assuming responsibility for their own financial planning. This was true of only 14 percent in 2006, and that share had increased to 27 percent by 2014. 3
Single men adjust their portfolios 50 percent more often than single women . However, their earnings are 1.5 percent lower. 4
Spread betting, a way of taking advantage of price movements of financial markets and products, is one example of a very risky investment. Women account for less than 10 percent of the 92,000 active clients of the IG Index, the UK’s largest company in this area. 5
Photo: Flurin Bertschinger / Ex-Press / RDB
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BEST POSITION #2
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(Winterthur, St. Gallen, Bern in the Swiss
edition)
Always buy railroads (see Best Position #1).
BEST POSITION #3
Three houses on each of the light blue color group (Aarau,
Neuchâtel, Thun in the Swiss
edition)
Monop
oly
NeuchâtelPlace Purry
100
ThunHauptstrasse
120
Winning StrategiesIs there any board game more well-known than Monopoly? However, few people play the game correctly. A mathematician explains why three houses are the best return on investment and why sometimes it’s good to be in jail. By Tim Darling (text), Crafft (graphics) and Hasbro (pictogram)
My first memory of Monopoly was the 50th anniver-sary version box set that we had in my house when I was a kid. That was many years ago. We’re coming up on the 80th anniversary this year. Besides the game it-self, our set also included a booklet with photos of the game from the 1930s, 40s, 50s of the American version I knew and versions from all around the world. Our game had wooden houses and metal tokens. The latter, I learned many years later, originated when one of the inventors, Charles Darrow, played the game with his
niece, who suggested using tokens from her brace-let. I learned early on that there was a history and art to the game.
In a lesson still relevant for our time, Mo-nopoly was created to demonstrate how fast the “rich get richer” rule plays out. Monopoly began at the turn of the 20th century as a game called “The Landlord’s Game” a few years after the stock mar-ket crash of 1893.
Now to the important question: How do you win? Of course, luck plays an important role when
After acquiring a complete color
group, build three houses as quickly
as possible: no more (no hotels!), no less. Three houses are the
sweet spot in the game. That’s how
you make the best use of your
money.
Jail can be good. Stay in jail as long as
you can if an opponent owns a
monopoly – at that point in the game,
moving around the board will likely
lose you money. Until that happens, though, pay the fine
and leave jail as soon as possible:
you need to be in the property
acquisition race and collecting
your salary.
ChurKornplatz
60
SchaffhausenVordergasse
60
LucerneWeggisgasse
260
ZurichRennweg
260
Bas
elFr
eies
tras
se 3
00
Gen
eva
Rue
de
la
Cro
ix-d
’Or
30
0
Ber
nS
pita
lgas
se 3
20
Lau
sann
eP
lace
S
t-Fr
anço
is 3
50
Water Works 150
Go to Ja
il!
Einkommenssteuer 200
Luxu
ry T
ax
10
0
Community Chest
Co
mm
uni
ty
Ch
est
Mon
orai
l C
ompa
ny
20
0
GO
At the beginning of the game, focus
on acquiring a complete color
group in the first 20 squares from “Go” (sides 1 and 2).
Once your first color group starts to
generate some cash, focus on completing
a color group and building houses
in the other half of the board
(sides 3 and 4).
BEST POSITION #1Acquire all four
railroads. The revenue flow
from railroads is much more con-
stant over time, whereas some of the
other properties may have the same
ROI but come with bigger payouts
over longer time spans. Owning
3-4 railroads is a cash cow: It will bring
a continuous flow of money that
can fund your monopolies.
Single properties are the worst investment if you don’t build on
them.
Never buy Utilities (at least
not at full price)The only exception
to these rules is when you need to acquire stray
properties in order to prevent your oppo-
nents from complet-ing their color
groups to accom-plish the above
strategy
Monop
oly
rolling the dice, but the right decisions are even more important. You need to have a strategy.
Computers can now simulate millions of games of Monopoly. From experiments with those simula-tions, a colleague and I determined how much income any given space on the board would be likely to collect on any random roll of the dice, or in economic terms: what is the return on investment (ROI) of the cheapest to the most exclusive properties on the board, taking the different building options into account.
We then calculated, for example, that recovering the purchase cost of the cheapest property (Vorder-gasse in Schaffhausen in the Swiss version) took over 1,000 rolls of the opponents’ dice. And, on the other side, the fourth railroad you buy – the one that takes the rent for all four of the railways you now own up to eight times the initial amount – recovers its purchase cost every 13 rolls. Clearly, railroads are good to have and good to keep your opponents from collecting.
A Monopoly Is the GoalBefore we get started, a short explanation: A monopoly is two or three streets in the same color, also known as a color group. The monopoly has a number of benefits and, in this case, is literally the name of the game.
To maximize your chances of winning, you have to get the best starting position, regardless of the short- term cost. Once you have properties that are generating rent from the other players, you will be able to fund fu-ture investments at their expense.
With these strategies and some luck, you have the best chance of bankrupting your opponents on the game board. Though may you be more generous in real life!
Tim Darling is a strategy expert in health care and works at Advanced Practice Strategies (APS) in Boston. He studied mathematics and computer science, and also uses his talents to explore his favorite game, Monopoly.
68 — Bulletin 1 / 2015
Am I a Tightwad?
1 Which of the following descriptions fits you best? (1) I’m a tightwad (3) Some of both or neither (5) I’m a spendthrift
2 Some people have trouble limiting their spending. They spend more money than they intended – on clothes, meals, vacations, etc. How well does this description fit you? That is, do you have trouble limiting your spending? (1) Never(2) Rarely(3) Sometimes(4) Often(5) Always
3 Other people find it difficult to spend money; they save more than is reasonable. How well does this second description fit you? That is, do you have trouble spending money? (5) Never(4) Rarely(3) Sometimes(2) Often(1) Always
4 The following is a scenario describing the behavior of two shoppers. Which one is like you? You go shopping with a friend. A supermarket is offering a special discount (“50 percent off, today only!”). Type A: It occurs to you that you might buy a few things that you need and save a lot of money, but you don’t like the idea of spending money when you didn’t plan to – so you don’t buy anything. Type B: Although you didn’t plan to buy anything, you tell yourself that “everything’s half price here” – and end up spending 100 francs.
Which type do you most resemble?(1) Type A, definitely(2) I’m more like Type A(3) Sometimes Type A, sometimes Type B(4) I’m more like Type B(5) Type B, definitely
Score Add up your points and divide the sum by four. • <2 = Tightwad – you buy less than you can
afford or need. You rarely indulge yourself. • 2 – 4 = Unproblematic consumer behavior – you
are satisfied with your consumption.• >4 = Spendthrift – you spend more than you
really want to. You tend to live beyond your means.
* Of the 14,000 people who participated in the study, 60 percent indicated that their consumer behavior was “unproblematic.” Of the remaining 40 percent, there were one-third more tightwads than spendthrifts. Also: more women than men are spendthrifts. Those under the age of 30 are more likely than older people to be spendthrifts. Someone who is over 70 is in all likelihood a tightwad.
Source: Scott Rick, Cynthia Cryder and George Loewenstein (2008), “Tightwads and Spendthrifts,” Journal of Consumer Research, 34 (6), 767-782.
Questionnaire: Mikael Krogerus and Roman Tschäppeler, authors of “Das Testbuch – 66 wissenschaftliche Tests, die Ihr Leben erklären” (Kein & Aber)Illustration: Andy Rementer
The questions on the famous “Tightwad or Spendthrift?” test, which was created in 2008 by economists at Carnegie Mellon University, may seem banal. But the test says a great deal about how you handle money.
— The Last Page —
SYMPHASIS works to improvethe living conditions of dis advantaged people, and provides support to young, single mothers and their children in Burkina Faso.
In addition, the foundationsupports the WASH program(WASH stands for Water,Sanitation and Hygiene) setup by Morija in the city ofFada-Ngourma, as the needfor drinking water and sanitaryfacilities is greatest here.
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