What would happen if there was no Fed?

What would happen, hypothetically, if the US Federal Reserve were eliminated? Could the monetary system still work?

In a world where the Fed no longer exists, there would be no central authority to set interest rates, manage inflation, or respond to financial crises. Let’s assume some other entity is still regulating other aspects of banks, like what percent of deposits they have to hold as reserves, but there’d be no one managing the money supply.

It’s worth noting right away that every country that issues its own currency also has a central bank that manages the money supply. That’s not a coincidence. A central bank is what gives a government control over interest rates, the money supply, and inflation. Without one, that control disappears.

Some countries, like Panama, Ecuador, and El Salvador, don’t have official central banks—but that’s because they use the US dollar as their official currency. In doing so, they’ve given up any independent ability to adjust monetary policy to suit their own economies. Interest rates and inflation in those countries are essentially determined by the US Federal Reserve.

If the US eliminated its own central bank, we’d be giving up that control, too. In theory, you could tie the dollar to something else—like gold—or set strict rules about how much money can be created. But even those systems usually require a central authority to function in practice. And with rigid rules, there’d be no straightforward way to respond to recessions or cool off inflationary booms. If there were no lender of last resort, financial panics could escalate much more easily. So while having a central bank may not feel important for your day-to-day life, it’s an essential component of well-functioning economies.