The etymology of ‘capital’ reveals an intriguing link between livestock and finance. In medieval Europe, cattle were a key form of movable wealth, giving rise to the word ‘capital’. This association of cattle with money persisted in ancient civilizations like Rome. Even today, cattle represent vital capital for many cultures. However, inflation has steadily eroded the attractiveness of equity investments like stocks. The fixed 12% return on equities fails to keep pace with rising prices. Equity investors face perpetual lockup and overvaluation risks in inflationary times. Still, stocks remain a popular investment, continuing the complex relationship between livestock and capital.
The shared etymology of ‘cattle’ and ‘capital’ shows how livestock represented movable wealth
The word ‘capital’ derives from the medieval Latin ‘capitale’, meaning both ‘livestock’ and ‘property’. ‘Cattle’ comes from the same root word, simplifying ‘capital’ into a term for cows specifically. Since cattle were the most valuable livestock, the word narrowed to mean cows raised as livestock. Likewise, ‘pecuniary’ meaning ‘financial’ arises from the Latin ‘pecunia’ or ‘cattle’. Equating cattle with movable wealth occurred across ancient Indo-European cultures. In Greek, the word for ‘interest’ was ‘tokos’, meaning profit from animal breeding. Similarly, the ancient Sumerian word ‘mash’ meant both ‘interest’ and ‘calf’. The dairy and meat from cattle made them a vital food source and store of wealth.
The shift of ‘capital’ from livestock to finance shows the modern abstraction of wealth
The financial meaning of ‘capital’ emerged from the medieval term ‘pars capitalis’, or ‘principal part’ – the amount borrowed that remains after interest. This sense of ‘capital’ as principal expanded to finance in the 18th century. Turning an animal into an abstract financial instrument reflects broader trends in modern economic thought. As physical currency was replaced by credit systems, wealth became decoupled from material goods. Investors began to pursue higher returns in financial markets, not just tangible assets. But inflation can devalue financial capital, as with livestock plagues that wipe out real wealth. Easily created credit heightens both the profit and instability of modern finance.
Rising inflation erodes equity returns and attractiveness relative to fixed-income
In the stable, low-interest rate environment after WWII, stocks were attractive for their 12% return and reinvestment potential, compared to 3-4% bond yields. But as inflation climbed in the 1960s, equity became less appealing. Investors faced overvaluation, wanting to exit. Unlike bonds, equities have infinite maturity. Overall, the equity capital locked in the corporate system increases. While earnings retention benefits shareholders when reinvested at high rates of return, it becomes a liability if returns drop. Inflation also hinders corporate profitability. Inventory turnover and replacement rises with inflation in the short term but eventually stabilize. Interest costs also rise, while turnover rates and leverage have little room to increase profits.
Perpetual lockup and overvaluation make equities a risky inflation hedge for investors
Inflation reveals the inability of equities to adjust returns upwards to match rising prices. Investors cannot renegotiate their stake in companies or get compensated for inflation via higher dividends or valuation. The perpetual lockup and overpayment risks make equities a poor inflation hedge. Traders incur substantial transaction costs without improving corporate productivity. Equities resemble bonds in offering fixed returns, vulnerable to inflation. While equities appear to offer unlimited upside, in aggregate their long-run returns remain around 12%, unable to break free despite soaring inflation.
The shared etymological link between ‘cattle’ and ‘capital’ points to core flaws of stocks as investments – exposure to inflation, perpetual lockup, and overvaluation risks. The complex relationship of livestock and finance persists today. Despite offering partial inflation hedges like real estate, ultimately no assets generate returns above inflation indefinitely. Investors should focus on managing risks, not pursuing unrealistic gains.