Recently, there has been no shortage of proposals for reforming the U.S. financial system. Proposals have been offered by the Hunt Commission, the Administration, and several other groups. All these proposals contain many common elements, attesting to the difficulty of obtaining comprehensive financial reform. The analysis here focuses primarily upon the Administration's 1973 recommendations.

The federal deposit insurance system of the United States was instituted as a result of severe financial crises in the United States and was intended to prevent the recurrence of some of the evils of such crises, specifically those resulting from bank deposit losses. Since the Federal Deposit Insurance Corporation (FDIC) was established in 1934, the United States has not experienced banking panics or harmful effects on the economy due to widespread destruction of bank deposits. As a result, there is a fairly widespread feeling that the present deposit insurance system has been a success. If prevention of panics and large-scale deposit destruction are the only criteria for success, this judgment may be justified, although, if the insurance system uses resources, it must be proved that panics and deposit losses would be unacceptably frequent or large in its absence.

I. Introduction, 288. — II. Monetary changes, interest rates, and national income, 288. — III. Lag in effect of monetary policy, 291. — IV. Measurement of effects of monetary policy changes, 292.

[This paper deals with simultaneous estimation of supply and demand functions for money in the United States. It gives special attention to supply formulations relating the money stock to maximum possible money stocks and to demand functions incorporating the product of national income and the rate of interest. The estimations test and attempt to improve on these formulations, and they provide evidence on the effects of changing measurement techniques of economic time series. Specifically, substantial differences emerge between estimates using quarterly averages of daily data on stock and flow variables and similar estimates using one-day end-of-quarter figures to characterize a series over a quarter. In the context of this investigation, quarterly average data appear superior in describing the true economic series, as at least some a priori judgments would suggest.]

Monetary authorities also tend to take for granted that an increase in the money stock lowers interest rates. From their vantage point, an increase in the money stock by way of an open-market purchase tends to lower market rates quickly, since purchasing securities raises their prices and lowers yields. Indeed, they rely on this relation in order to control rates. Accordingly, interest-rate movements are frequently viewed as indicators of recent monetary policy. Since the money/interest-rate relation is used in implementing monetary policy, it is particularly important that the monetary authorities know how the relation works. If the monetary authorities believed that they lower interest rates by increasing the money stock whereas this at first lowers and then later raises rates, the authorities' actions would work first toward and then against an interest-rate goal. Further, if interest rates are viewed as indicators of monetary policy, incorrect conclusions can easily follow if total effects are disregarded in favor of initial effects. The trouble with using interest rates as indicators of monetary policy is as follows: If income increases faster than money, interest rates will tend to rise, but if the income increase results from increases in the money stock, should monetary policy be called restrictive?