The Fed was not created to conduct monetary policy. It was created to promote financial stability, to ensure that private banks could redeem their claims to dollars (i.e., gold) by providing emergency liquidity when necessary. The architects of the Federal Reserve Act explicitly denied they had created a central bank. They described the Fed as a publicly-supported super-clearinghouse. …

With the suspension of the dollar’s redeemability for gold in 1934 (domestically) and 1971 (internationally), the Fed’s mission was expanded to include control over monetary policy. It has not handled this responsibility very well, either. Inflation has been higher and the future purchasing power of money has been harder to predict under the Fed.

In retrospect, creating the Fed was a mistake. Policymakers should have reformed U.S. banking into a free banking system, which was an option at the time. Private banks don’t need a central bank to stave off financial turmoil. They are well aware of the illiquidity-insolvency problem and can take steps to counter it. The most important measure is creating and maintaining a private clearinghouse.