For years, Rep. Ron Paul (R-TX) has been on a crusade to reduce the influence of the Federal Reserve. Indeed, he even wrote a book called "End the Fed," which suggests that the U.S. would be better off without a central bank. While it might have been easy for Congress to dismiss such calls to abolish the Fed in the past, Paul was recently named chairman of the House Domestic Monetary Policy Subcommittee. In other words, he runs the committee that oversees the Fed, so he will probably challenge the central bank every chance he gets. As a result, now might be a good time to wonder why we need the Fed.
What Does the Fed Do?
The natural place to begin is with the Fed's responsibilities. Here are its four central duties, from a document (.pdf) on its website:
1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
So the first important point is that the Fed actually does a lot. You can't simply eliminate these functions. If you got rid of the central bank, you would need to push many of these functions to other regulators or private firms. For example, inflation has to be kept in check somehow. Prudential supervision is also important. The problem with eliminating the Fed is that you would need to delegate these responsibilities to another entity that could do them better.