When the money doctor hesitates, the patient pays

I spent enough time watching colonial paper money depreciate to know the pattern well. A body issues a promise. The promise is credible so long as the issuer is willing to bear the cost of keeping it. The moment the issuer flinches — the moment the pain of the remedy exceeds the pain of the disease, in the issuer's own private ledger — the promise begins to rot. The holder of the money pays the difference. She always does.

CNBC reports that fresh August CPI data now places Kevin Warsh in exactly this position. He arrives at the Federal Reserve having spoken plainly about inflation and the need for stern policy. The data, by this account, supports action. The question the story puts is whether he will waver. I cannot know what Mr. Warsh will decide — inference only, not recollection — but I can say this: a central banker's credibility is a form of currency in its own right, and it obeys the same laws as any other. Spend it without backing, and it depreciates.

The working tradesman and the small farmer do not follow the deliberations of central banks. What they follow is the price of bread, the cost of a short-term loan, and whether the dollar they put in their pocket on Monday still commands the same goods on Friday. When an institution charged with price stability vacillates between its stated principles and the political comfort of inaction, it is those people — not the bond traders — who absorb the loss first and most directly. This, I observed in my own era with paper money badly managed by colonial legislatures, and I see no reason the mechanism should have changed.

There is also a subtler cost, which the CNBC analysis implies without quite stating (I mark this as inference): a chairman who makes his reputation on hawkish rhetoric and then stands down at the first serious test does not merely fail to fight inflation. He teaches every market participant that the next warning can also be discounted. He has, in effect, debased his own word. Poor Richard once noted that creditors have better memories than debtors; I would add that markets have better memories than politicians.

I am not arguing for rate hikes as an end in themselves — I never thought pain was a virtue for its own sake. Sound money policy, like sound household management, is not about severity; it is about consistency. The household that sets a budget and keeps to it suffers less, across time, than the one that sets a budget and revises it whenever the sacrifice becomes inconvenient. The same is true of central banks.

Counsel for the working person: When those who govern the currency signal that their rules bend under pressure, treat every long-term fixed-income promise with extra skepticism, and keep a closer eye than usual on what your savings will actually buy six months from now — not what the nominal figure says, but what the grocer confirms.