If insuring creditors of commercial banks in the way they have been insured since mid-1933 is justified, then so is regulation of so-called insured banks, those with creditors insured by the Federal Deposit Insurance Corporation (FDIC). In creating the FDIC, the Congress mandated a pricing policy: all banks with FDIC-insured creditors were to be charged alike; more particularly, the FDIC was not to charge insured banks according to the riskiness of their respective balance sheets. Nor has it ever. Yet, with an insurance premium that is constant across balance sheets, there is an incentive for risk taking. And thus, unless insured banks are to be as risky as profit maximization dictates, they must, one way or another, be effectively regulated; they must, that is, be limited by regulation to appropriately risky balance sheets. It does not follow that U.S. bank regulatory policy of the years since 1933 is beyond criticism. For example, we must wonder about the geographical restrictions imposed under the McFadden Act and the Douglas Amendment to the Bank Holding Company Act. But it does follow that if banks with FDIC-insured creditors are to be made entirely free, except perhaps of reserve requirements, or even largely free, then it is necessary to either close up the FDIC or, if doing that seems unwise, change FDIC policy. There has already been some deregulation. Most importantly, Regulation Q has been made much less effective than it was; and evidently it has been marked to become, very soon, a thing of the past. So far, however, beyond deregulating, the Congress has not bestirred itself. The FDIC is still occupying its Washington corner. Although FDIC officials have hinted at change, its policy is still by and large what it was. And the Congress, being ever so respectful of the consumer lobby, may never want to do anything. Nevertheless, in this paper I consider various things it might do: namely, close down the FDIC, but at the same time impose a new valuation rule for bank portfolios; change FDIC pricing policy; and, lastly, without doing anything else, simply close down the FDIC. I do not end up by saying what, as I believe, the Congress ought to do. My purpose is only to determine, as best I am able, which of those several apparent congressional options of mine are in reality feasible. I would add, however, that the Congress, if bent on deregulating banks or obliging the regulatory agencies, has more to do than decide what to do about the FDIC. It seems also to be bent on deregulating or allowing the deregulation of savings and loan associations. There has already been more deregulation of savings and loan associations than of banks. So the Congress has also to decide what to do about the Federal Savings and Loan Insurance Corporation (FSLIC). Fortunately, to explore what it might do about the FDIC is perforced to explore what it might do about the FSLIC.

Myron Ross correctly points out in his comment that U.S. price inflation is better predicted by the American money supply (MlUS) than by the broader ten-country world money supply (MlW) over the whole statistical time-series from 1960 to 1980 provided in McKinnon's 1982 article. Specifically, he showed that American price inflation is more highly correlated with MlUS lagged one or two years than with MlW similarly lagged. However, McKinnon's present-tense assertion that general, in the world money supply is a better predictor of American price inflation than is American money growth applies only to the weak dollar standard of the 1970's and early 1980's-as his preceding discussion intended, but failed to indicate clearly. Only in this later period of volatile exchange rates and price-level instability in the United States do alternative hard currencies (such as the yen and deutsche mark) become competitive as international stores of value and units of account. Hence, international currency substitution-associated with the ebb and flow of speculation against or for the dollar-significantly destabilized the demand for MlUs in the 1970's and 1980's. And only in this later period might one expect the sum of these internationally substitutable monies, Ml, to predict world, and perhaps even American, price inflation better than does Mlus. In contrast, during the strong dollar standard of the 1950's and 1960's, the dollar was unchallenged as international money. Exchange rates were (by and large) convincingly fixed: speculation for or against the dollar was incapable of substantially altering U.S. interest rates or of directly affecting the demand for MlUS. Because cyclical international influences did not then destabilize the demand for dollars, MlUS was by itself a fairly efficient predictor of American prices. Thus Ross's statistical results for the period 1960 to 1980 show somewhat greater predictive strength in Mlus, compared to Ml', because the 1960's data outweigh the dissimilar data of the 1970's. Let us instead partition the sample of IMF data around the year 1970, whence began the transition from fixed to fluctuating exchange rates and the maturation of alternative monetary systems in Europe and Japan. After applying similar statistical correlation procedures to those used by Ross, we show a striking structural shift in the world's monetary system: the explanatory power of Mlw increases sharply as that of MlUS declines moderately (Tan, 1982). For the early period of 1960 to 1970, Table 1 shows simple correlation coefficients between annual percentage changes in money supplies and changes in American and world wholesale price indices. The MlUs provides a good explanation of U.S. prices and of world prices one to two years hence, whereas the broader definition of Mlw (in which MlUs enters with a 50 percent weight) does surprisingly poorly, being insignificantly correlated with American or world prices. Apparently, money in industrial countries other than the United States was not then an independent source of worldwide inflationary pressure during the strong dollar standard. Table 2 shows the same simple correlations between percentage changes in prices and money for the weak dollar standard of * Stanford University. Please note that a typographical error giving the last word in the original title as Market appeared on the cover of the June 1982 issue of this Review. The title was correct in the table of contents and on the article.

Although industrialized countries continue to have business cycles, such cycles have changed significantly in character. In what follows I shall describe some of these changes and point to their possible implications for research and policy. Perhaps the most obvious change is that business recessions-periods of actual decline in economic activity -have become less frequent, shorter and milder. Interruptions to a steady rate of growth are more often simply slowdowns rather than actual declines in aggregate economic activity. This kind of shift can be observed in the business recessions identified by the National Bureau of Economic Research. On the whole, the five recessions of 194870 were shorter than the five recessions of 1920-38, produced smaller declines in output, income and employment, and were less widespread in impact. But recent recessions have been accompanied by higher rates of unemployment than might have been expected in view of other evidence attesting to their mildness. One of the factors underlying this shift toward recessions of lesser severity, and one reason why it may be expected to persist, is the trend in the industrial composition of employment. Industries that normally experience larger percentage reductions in employment when recession hits are less important in the overall economic picture nowadays, while industries that often continue to expand right through recession have become more important. Of the eleven major industrial sectors that account for total employment, seven experienced reductions averaging three percent or more during the five recessions of 1948-70 (Table 1). These seven sectors include manufacturing of durable goods like autos and appliances, with an average drop of 12 percent; mining, with an average drop of 10 percent; transportation and utilities, with an average drop of 5 percent; and farming, manufacturing of nondurable goods like textiles, construction, and federal employment, with drops of 3 to 4 percent. Employment in these seven sectors constituted more than half of total employment in 1955, but by 1972 their share had declined to about two-fifths. The other four major sectors--wholesale and retail trade; services; finance, insurance, and real estate; and state and local government -experienced much smaller declines or actual increases in employment during the five most recent recessions. They accounted for slightly less than half of total employment in 1955; by 1972 they accounted for three-fifths of the total. In short, the industries that have coiitributed most to reduced employment during recession have shown little or no growth during the past fifteen years or so, while those that have contributed least to recession have grown much faster. The added stability has reduced the impact of recession upon total employment by something like one-third. If the 1955 distribution of employment among the eleven sectors had prevailed in all five recessions of * Vice-President/Research, National Bureau of Economic Research, Inc., and Senior Research Fellow, Hoover Institution, Stanford University.

The effects of minimum wage legislation on the employment and wage rates of youth are estimated using a new statistical approach. We find that without the minimum, not only would the percent of out-of-school youth who are employed be 4 to 6 percent higher than it is, but also that these youth would earn more.