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of the Chilean peso and the appreciation of the dollar. The pegging of the currency undoubtedly encouraged the heavy inflow of capital in 1980 and 1981. The appreciation of the dollar had the opposite effect, by making capital investment in Chile less attractive to non-dollar foreign investors. In addition, its effect on the Chilean balance of payments and the domestic economic situation raised fears of a devaluation against the dollar, which discouraged dollar investors.

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* In another article, Barkai (1990b) compares the reforms undertaken at about the same time in Israel, Argentina, and Brazil. Israel's was a success; the other two were failures, slowing inflation only briefly. He attributes the difference to Israel's enforcement of a tight monetary policy and a reduction in the government deficit, contrasted with the failure to do so in the other two countries.

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* The shekel was devalued in January 1987, December 1988, January 1989, June 1989, and September 1990, by 12, 5, 8, 4, and 10 percent, respectively. †Based on the Federal Reserve Board's "weighted-average exchange value of U.S. dollar against the currencies of 10 industrial countries."

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† This section draws heavily on Friedman (1989).

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* Such a currency board was the standard arrangement for British colonies during the heyday of the British Empire.

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* For the first thirty years after the FDIC and the FSLIC were instituted, failures were few and far between, either of commercial banks or of savings and loan institutions. While depositors had nothing to lose from excessive risk taking by banks, equity owners did. Hence, so long as there was a substantial equity cushion, the owners (or, for mutual institutions, the managers) had ample incentives to avoid excessive risk.

The accelerating inflation of the 1970s produced a rise in interest rates that undermined the net worth of both banks and savings and loan institutions, all of which borrowed on demand and loaned on time. Savings and loan institutions were particularly vulnerable because their assets consisted primarily of mortgage loans at fixed rates for long periods. Once net worth is eliminated, banks have an incentive to engage in risky activities: it's a "heads, the bank wins, tails, the taxpayers lose" proposition. Hence, the late 1970s produced a substantial rise in commercial bank failures and a catastrophic jump in savings and loan failures.

Had monetary growth been restrained from 1970 on, the accelerating inflation would have been avoided, and the number of annual bank and savings and loan failures would still be in single digits, despite the defects in the insurance arrangements.

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* The most important residual effects of inflation on the personal income tax arise from the failure to adjust capital gains and interest rates for inflation. Nominal capital gains and nominal interest receipts are subject to tax, not the nominal values of real capital gains and real interest receipts. There are also residual effects on the corporate income tax.

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* I believe I first published the statement in these words in Friedman (1963), which was reprinted in Friedman (1968, p. 39).

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