Capital Issue

Stocks captivated the American imagination in the 1920s in a fundamentally different manner from the British investor movement of the Victorian era.… The Foreign and Colonial Government Trust was fashioned to capture high average bond yields, not capital appreciation of shares. Keynes was an exceptional early advocate of equities as the future of finance, but he was a bit ahead of his time in Britain. But in US, tastes turned sharply toward equities. Americans still bought bonds, but people grew increasingly wary of them. One thing made bonds less safe in the modern era: they carried the risk of inflation.

The hyperinflation in Germany after World War 1 horrified the world. From 1921 to 1924, prices in Germany rose more than a trillion times over: currency reform in 1924 involved lopping off 12 zeros from the bills in circulation. Money was literally not worth the paper it was printed on. Yale economist Irving Fisher went so far as to postulate that ordinary people could not even perceive the terrible effects of currency devaluation. In a curious, perhaps unconscious echo of Marxist ‘money fetishism’, Fisher coined the phrase ‘money illusion’ to describe the human tendency to believe that the ‘nominal’ value of currency was somehow fixed and reliable. He argued, instead, that people needed to be convinced to use ‘real’ value: the value after accounting for inflation.

From “Money Changes Everything: How Finance Made Civilisation Possible”