It has long been an observation of mine, set out with some care in the Wealth of Nations, that the price of any commodity tends naturally toward that level which is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in its production. The price of money is no different in kind, only in the machinery by which it is discovered. When the institution appointed to govern that machinery speaks plainly, merchants and their factors may act with corresponding plainness. When it speaks in half-measures and strategic silence, the whole weight of discovery falls upon those who borrow and lend in the open market — and they must bear it as best they can.
The present circumstance in the North American republic is of precisely this character. The Board of Governors of the Federal Reserve System, that body charged with the supply and price of the circulating medium, finds itself in what I can only describe as a posture of deliberate reticence. Its successor in intellectual temperament, Mr. Kevin Warsh — a man of considerable reputation in these matters, having served formerly upon that same Board — is understood to occupy a position of renewed influence, and the disposition attributed to him is one of studied restraint. The market, as a consequence, is required to perform functions of signalling and price discovery that a more communicative sovereign institution would itself perform. This is not nothing. It is, in fact, a very great deal to ask of men whose principal concern is their own profit, however respectable that motive may be in its proper sphere.
To assist in this navigation, certain observers of the money market have fixed upon two measures as particularly instructive: the yield upon short-dated instruments of public debt, which reflects expectation of the Board's immediate intentions, and the spread between instruments of longer and shorter duration, which reflects expectation of its intentions at distance. These are, in the language I employed in the Theory of Moral Sentiments when describing the sympathetic imagination, the nearest approximations we possess to another's interior state when that state is not directly communicated to us. We infer what we cannot observe. We watch the face because the mouth will not speak.
There is a certain irony — not, I hasten to add, an amusing one, but a structural one — in the fact that an institution constructed expressly to reduce the uncertainty of commerce should become, through its silences and its studied ambiguity, a fresh source of that very uncertainty it was designed to alleviate. The labouring poor, who borrow at rates set ultimately by the Board's disposition, do not benefit from a system in which the meaning of that disposition must be decoded by specialists consulting charts. Yet here we stand.
Those who seek their footing in such a season would do well to remember that the market, like the impartial spectator I described in the Theory of Moral Sentiments, is not omniscient — it is merely the aggregated conjecture of all interested parties, each reasoning from imperfect information, each hoping the other knows somewhat more. In such circumstances, the prudent man does not seek certainty, for certainty is not on offer. He seeks instead the best available approximation of it, keeps his engagements modest, and reserves a portion of his judgment against the possibility that the central institution will, in time, condescend to explain itself more fully. It generally does, though seldom at the moment one would find most convenient.