In the garden caterpillars are usually bad since they eat leaves and fruit. However, butterflies and moths are usually considered good since they are great pollinators and beautiful to look at. Unfortunately you can't have butterflies and moths without caterpillars.
At the Fruitful Field we prefer to let all of these live unless they are creating a problem. If there are just a couple of holes in your plant leaves let them go. However, if they are completely destroying your crop, by all means check out the Control section below.
Varies by species
Caterpillars damage plants by eating their leaves and in some cases their fruits. Some do very little damage, particularly to large plants. Others do significant damage such as the hornworm on the right. Hornworms are usually found by tomato farmers who are trying to figure out where half their plant went. Tobacco hornworms are voracious eaters and can increase their weight ten-thousandfold in less than twenty days .
If caterpillars become a problem you may decide to get rid of them. If it is a small infestation, they are easy enough to pick off. Be careful because some hairy varieties have the ability to sting. For a larger infestation spraying is possible with bacillus thuringensis (BT). BT is a bacteria that kills caterpillars but does not affect humans. Be careful with any spraying since BT can affect buttefly and moth populations. Please spray as small an area as possible, and never spray on a windy day. You can find BT at Home Depot under the brand name Thuricide.
 Wikipedia.com, "Caterpillar", http://en.wikipedia.org/wiki/Caterpillar