There is a species of communication that requires no pamphleteer, no broadsheet, and no public address: the quiet, accumulating signal of a market in which men who lend money to sovereigns begin to demand a greater return for the privilege. That signal is presently audible in the markets for the funded debt of the United States, and it deserves the attentive examination that any honest student of political economy must give to a phenomenon so consequential.
The yields demanded upon Treasury obligations have risen with a persistence that market observers describe, in terms I shall freely paraphrase, as reflecting an enormous and growing anxiety respecting the future course of prices. Inflation — that steady diminution in the purchasing power of money — is the great adversary of every fixed creditor, and those who hold the government's paper are fixed creditors in precisely this sense. When they suspect that the sovereign's currency will be worth less at redemption than at purchase, they exact a premium in advance. That premium is the yield, and its rise is the market's polite but unambiguous statement of distrust.
The officer now charged with governing this matter is Mr. Kevin Warsh, recently elevated to the chair of the Federal Reserve. The institution over which he presides holds, in the tradition of central banks established long after my own time, the authority to set the rate at which money is lent among commercial banks — a rate which propagates, with uneven speed and imperfect fidelity, throughout the broader structure of credit in the economy. Mr. Warsh and his colleagues have spoken with some firmness about their intention to resist the further advance of prices. The bond market, it appears, is not yet persuaded that the speech will be attended by the deed.
This is no new predicament. In The Wealth of Nations I observed at some length that public credit rests upon the perceived probity of those who manage it, and that once that perception is disturbed, the restoration of confidence demands not assertions but evidence of conduct. A statesman who declares his resolve whilst declining to act upon it does not reassure the creditor; he instructs him to demand more interest in the meantime.
The funded debt of the United States now stands at figures that would have rendered any finance minister of the eighteenth century speechless with astonishment — a sum in the neighbourhood of thirty-six trillion dollars, against which the annual revenues of the state must be measured and found, by most reckonings, substantially wanting. Into this landscape of accumulated obligation, the present contest between declared intention and actual policy is not merely a technical dispute among men of the counting-house. It is a test of whether the institutions entrusted with the management of money are capable of subordinating the easier course to the necessary one.
The market for public debt is, in this respect, among the more useful inventions of commercial society: it records, continuously and without flattery, the collective judgment of those who have the most direct interest in being right. Whether that judgment will be satisfied by Mr. Warsh's forthcoming conduct is a question the autumn will answer rather more plainly than the summer has so far permitted.