It is a principle I endeavoured to establish at some length in The Wealth of Nations that the value of money, like the value of any other commodity, is subject to the ordinary operations of supply and demand — and that those who issue it in abundance without proportionate increase in the wealth of the nation do not thereby create prosperity but merely redistribute it, silently and at the expense of those least positioned to perceive the mechanism. April's figures for the general price level, now entered into the public record, remind us that the mechanism remains as reliable as ever, whatever the convenience of those charged with its management.
The Federal Reserve — that body entrusted by the sovereign with the extraordinary privilege of determining the price of money itself — had, in preceding months, enjoyed a certain shelter from the demand that it act. Prices had moderated sufficiently that a man of determined equanimity might argue the worst had passed. April has stripped that argument to its frame. The index measuring the cost of common goods and services rose with a vigour that admits of no comfortable interpretation, and the bond markets, which are composed of men whose livelihoods depend upon correct anticipation rather than agreeable sentiment, have registered their view accordingly. Yields have moved in the manner of a creditor who has extended great patience and now presents his account.
Into this circumstance steps the new Governor of that institution, whose record inclines toward a sterner conception of monetary discipline than his immediate predecessor. He inherits a situation in which the market has, in effect, already rendered judgment: that the price of borrowing must rise, and that further delay serves principally to compound the eventual cost of correction. The bond market does not deliberate by committee, nor does it issue statements of reassurance. It simply prices what it expects, and at present it expects more.
I observed in The Theory of Moral Sentiments that the man of real prudence does not trust to the frail reed of good intention where the sturdier staff of principle is available. A central bank that has watched prices advance through successive seasons while searching for reason to hold its hand is a study in the difficulty of that counsel. The market, it appears, has grown weary of searching with it.
It is worth remarking, without particular emphasis, that the accumulated stock of the sovereign's debt now approaches thirty-six trillion dollars — a sum that renders the question of the interest rate not merely a matter of monetary philosophy but of annual fiscal arithmetic of the most pressing kind. That the institution responsible for setting that rate operates in full awareness of this arithmetic is, one trusts, already understood by all parties.
The prudent course, as it generally is, was available somewhat earlier than the present moment.