Preheat oven to 325 degrees F. Butter two 9-inch layer cake pans and line the bottoms with parchment or waxed paper. Butter the waxed paper.

To make the cake, sift the flour with the baking powder together in a medium mixing bowl and set aside. In a large mixing bowl, cream the butter until fluffy, then gradually add the sugar, beating until creamy. Add the eggs, one at a time, and beat in thoroughly. Add the flour mixture alternately with the milk, beginning and ending with the dry ingredients. Stir well after each addition, but do not overmix. Stir in the vanilla extract. Turn the batter into the prepared pans. Bake until the tops of the layers spring back when lightly touched and a wooden skewer inserted in the centers come out clean, about 35 minutes. When the cake is done, cool 10 minutes in the pans, then turn out onto wire racks to cool completely before frosting.

To make the frosting, place 1/2 cup of the sugar in a heavy or cast iron skillet set over medium-high heat and cook, stirring constantly, until caramelized. In a large saucepan, combine the remaining 2 cups of sugar with the milk and bring to a boil. Add the caramelized sugar to the boiling milk mixture and cook, stirring constantly, to a soft-ball stage when added to cold water or to between 234 to 240 degrees F on a candy thermometer. Remove saucepan from the heat, add the butter or margarine and vanilla, and beat at high speed until thick enough to hold to the cake when spread. If the frosting becomes too thick, beat in a few drops of hot water. If it seems too thin, beat in a little powdered sugar.

To frost cake, spread the caramel frosting over one layer of the cake, top with the other layer and cover the top and sides of the entire cake with the remaining frosting (wetting the knife makes spreading easier).