I don't think this is so much an "either/or" situation (either change this about the Fed or end it) as it is a "let's change this about the Fed if we absolutely must keep it around for a while, but then let's end it a.s.a.p." situation. 

The economy can expand without any Fed involvement at all -- even of this more limited sort -- and indeed even this is violence to the free market.

Yeah, if you read their policy handbook, CATO's handbook does explore the possibility of a pure free market free banking monetary system but if obviously, a Fed without a dual-mandate and only concentrating on price stability is superior to what we now have. And the chapter in the Handbook forsees eventually a Hayekian approach:

"The growth of electronic commerce will increase the demand for new
methods of payment, methods that economize on paper currency. As
consumers’ trust in electronic cash grows, the demand for the Fed’s base
money may decrease. That would actually make the implementation of
a monetary rule easier because the Fed need not worry about complications arising from changes in the ratio of currency to deposits, according to monetary economist George Selgin. Indeed, Milton Friedman’s simple rule of zero growth of the monetary base may work quite well in the information age, and it may be a step toward private competing currencies, as advocated by F. A. Hayek."

Also,

But Congress should not limit its vision to a monetary system dominated
by a government-run central bank, even if that institution is limited by a
monetary rule.

Also, CATO's Arnold Kling supports the Fed audit, http://www.cato.org/pub_display.php?pub_id=11702

It's important to note the CATO Institute has no official stance on these sorts of things, instead it's policy scholars take stances. There are several CATO scholars who take the audit the Fed, Hayekian free banking approach (George Seglin for example). Also Judy Shelton at the Atlas Economic Research Foundation, a sister organization to CATO, advocates abolishing the Fed and returning to the gold standard.

This is very true Bonnie, actually, I think it states as well in the handbook, that if monetary policy were not done subjectively and there was a set increase in the money supply each year, there would be absolutely no need for the Federal Reserve, it would be a purely mechanical process.

What purpose does a set increase in the money supply serve?  This would simply be a "set" tax on the purchasing power of savings.  And the set point will of course change for the greater as time goes on and politicians get their say.  End the Fed, end legal tender laws, end this central command madness. 

I think that the only thing we should be arguing for is the abolition of the Federal Reserve altogether, rather than compromise with those arrogant enough to believe they know what the most "stable" amount of monetary inflation is.

definitely no compromise and I am all for the elimination of the Fed. However, a set increase in the money supply each year to approximate for true economic growth is not really a compromise since, in this case, the Fed would have nothing to do and therefore would be rendered obsolete. Either way, the legal tender laws should be eliminated, so that no one has a monopoly over the currency.

The Federal Reserve plays an important role outside that of controlling the money base (and, by extension, interest rates and employment policy).  So, while the role of buying securities on the open market to increase the supply of money by a certain amount annually could be preformed by an institution such as the U.S. Treasury, there is an important role the Federal Reserve plays that maintains its relevancy outside of the scope of national monetary policy.

As Murray Rothbard writes in his history of the Federal Reserve, the central bank was supported as much by the the private banking system as it was by the U.S. Government.  The fact that it also takes on the role of "lender of last resort", allowing banks to practice otherwise extremely unstable lending standards (this includes, if you're an Austrian, the extension of fiduciary media well beyond an increase in demand for money), means that the Federal Reserve would still probably have a case for existing even if it no longer could manipulate the rate of inflation.

In any case, although I am usually one to accept compromises, as any movement towards liberty is good, I think that only a free market in money will do in this case.

yes, but the "lender of last resort" scenario is subjective and is still performed by the creation of new dollars. I think the way Friedman envisioned the system was that this policy would not be an option if there was no such subjectivity in monetary policy.  Therefore, the congress couldn't just decide that so and so bank must be bailed out and call upon the Fed to fire up the printing press.

 The difference between me and people like Murray Rothbard is that, though I want to know what my ideal is, I think I also have to be willing to discuss changes that are less than ideal so long as they point me in that direction. So while I'd like to abolish the Fed, I've written many pages on how the Fed, if it does exist, should be run.

-Milton Freidman

Reason Magazine Interview with Milton Fridman

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