The MPAA came into being in 1968 due to a variety of factors, none of which happen to be that "the vast majority of Americans are too lazy to check out the movies their kids watch." For thirty-plus years the studios had been operating under the Hays Code, which was authored in 1930 but not strictly enforced until 1934 (by Joseph Breen and the Production Code Administration). The Hays Code has been noded elsewhere, and it's an entertaining read, but the main thing to understand is that the PCA would not put its seal on films that were considered unsuitable children or other easily-influenced audience members. (So, in effect, all films had to be rated 'G' to be released.) This worked quite well when all the studios, who were the PCA, were doing well. It has often been argued that studios choose to self-regulate because they want to avoid government censorship; while the Supreme Court occasionally rules on film-related cases, the government as a whole has never shown much interest in monitoring the industry to the extent which it regulates itself. So it can safely be argued that the MPAA and PCA were both set up as public-relations outfits: Look, the film industry cares about its audience, we swear to Gaud.)

When, in the 1960s, box office began to drop, the studios got a desperate sense that they needed to expand their product line. At the time, the studios faced major competition with exploitation cinema: directors like William Castle, Russ Meyer, and (in the very early days) Francis Ford Coppola, who would travel from town to town, "buy" the theater for a day (thus freeing the theater owner from any legal liability), and then get the hell out of town before local censors could get together a picket line. (See the film Matinee, inspired largely by Castle, for an example of how this worked.) The films sold themselves on the basis that they defied the production code: They featured nudity, violence, and political themes the PCA never would have endorsed. When, in 1966, MGM decided to release the adult-themed Blow-Up without first getting a code seal, and had no problems whatsoever with local censorship, studios determined that they'd be free to create a self-regulatory system based on variable obscenity: the principle that what is obscene to a child might not be obscene to an adult. Yes, it's still silly and still arbitrary - especially considering that the MPAA has no stated regulations, nor does it release information about the cuts it recommends and why it recommends them. But this thinking also paved the way for the making of adult-themed films like A Clockwork Orange, The Exorcist, Midnight Cowboy, etc., all of which would have been impossible before 1968.

It's also important to note that all the original letter ratings, except for X, were copyrighted by the MPAA in 1968. This means, essentially, that unless you submitted your film to the Classification and Ratings Administration, or CARA, MPAA's ratings board, you couldn't put a 'G', 'PG,' or 'R' sticker on any of the promotional material without running afoul of the law. Valenti thought no one would want to make a film branded X. But several Hollywood films (including Midnight Cowboy, which won Best Picture the year it was released) were given the X rating and were nonetheless exceedingly successful. Not only that, the lack of copyright protection freed independent filmmakers to rate their own films X and use it as a selling point. Thus the brief renaissance of hard-core pornography in the United States between 1968 and 1973 (Deep Throat grossed nearly as much as The Godfather in 1972), which caused the studios further anxiety. The copyrighting of NC-17 has then had the desired effect of keeping studios out of the hardcore business, and keeping hardcore pornography underground.