Kevin Warsh and the Erosion of the Dollar

Kevin Warsh is scheduled to testify before the Senate Banking Committee on Tuesday. The vote on his confirmation as Federal Reserve chairman may hinge on the Justice Department’s dropping its inquiry into whether the current chairman, Jerome Powell, testified inaccurately about cost overruns in renovating Fed headquarters. It would be a pity if we have to wait. The U.S. dollar would benefit from new thinking at the Fed.

Lawmakers should be much more focused on the damage that Fed policies are inflicting on the soundness of America’s money. It’s also time that Congress, which is charged with ensuring a trustworthy currency, recognized that outsourcing this responsibility to the Fed is a big part of the problem.

Article I, Section 8 of the Constitution grants Congress the power to regulate the value of money. The same sentence grants Congress the power to fix the standard of weights and measures.

America’s money was meant to provide a reliable measure and store of value. An unvarying monetary standard was integral to the founders’ vision of a nation dedicated to personal liberty and economic freedom. James Madison believed a depreciating currency was “unconstitutional” because it “affects the rights of property as much as taking away equal value in land.”

The original commitment to ensuring a dependable dollar has given way to a generalized acceptance that the dollar should be managed by political appointees and technocrats—despite public outcry over perpetual inflation. The Fed deliberately seeks to reduce the value of the nation’s money by 2% annually.

This monetary policy of intentional debasement was made public in 2012 at the urging of then-Fed Chairman Ben Bernanke. Strangely, it was deemed consistent with the central bank’s mandate to promote “stable prices.” Assuming the Fed succeeds, the 2% inflation target translates into a nearly 80% decline in the dollar’s purchasing power over the average lifespan of an American. Therein lies the problem—and the challenge—for the next leader of the Fed.

If the reliability of the nation’s monetary unit is viewed as a basic property right, the current Fed chief has a lot more to answer for than mismanaging a building renovation. Since Mr. Powell took over the Fed in February 2018, cumulative inflation has increased dollar prices by more than 31%, according to the Consumer Price Index.

How do you reconcile the American ideal of sound money with the reality of a central bank that describes itself as “ultimately accountable to the public and the Congress” even as its top official asks a judge to quash grand-jury subpoenas from the Justice Department? Despite stating in a video that “no one—certainly not the chair of the Federal Reserve—is above the law,” Mr. Powell asserts that the Justice Department’s actions are intended to harass the Fed over its interest-rate decisions. Mr. Powell dismisses the legal inquiry as a pretext and, in public statements, further threatens to remain on the Fed’s Board of Governors beyond his term as chairman.

Enter Mr. Warsh, who rightly contends that the Fed has inappropriately enlarged its role in steering the economy. “Granting boundless power to government agencies to solve the world’s problems does not square with my disposition,” Mr. Warsh said last April at the International Monetary Fund’s annual spring meetings in Washington. “To be trusted, economic institutions must be trustworthy,” he affirmed. “To be trustworthy, they must prove themselves competent.”

In August 2022, when inflation was running at 8.3%, Mr. Powell stated, “Price stability is the responsibility of the Federal Reserve.” Such declarations mean nothing when failure to perform carries no penalties. For all the sanctimonious talk about the Fed’s mandate to deliver price stability, Mr. Powell has yet to apologize—let alone resign—for having missed the mark.

Let’s hope Mr. Warsh’s confirmation hearing provides an opportunity to focus on America’s founding principle that money should serve as an honest measure. Congress should acknowledge its error in not preserving the purchasing power of the dollar. Deferring to the discretionary authority of central bankers fails to honor the legislative branch’s constitutional charge.