Endowments in Jeopardy

THERE is probably no nation in the world that believes more strongly in higher education than the United States. In number of college students we lead the world, with more than a million men and women regularly enrolled at the present time. And no other country can compare with the United States in the number of its colleges supported by private endowments or in the amount of these endowments — the accumulated gifts for generations of self-sacrificing public-spirited citizens.

These great educational foundations are to-day being threatened by inflation. I should like to cite one of many possible illustrations of what happened in Europe under the extreme inflation that followed the World War.

Dr. Stroof, a wealthy philanthropic citizen of Germany, died in 1921 and left a fortune of 7,821,000 marks to the University of Frankfurt. The bonds in which the money was invested were transferred to the University in seven installments during 1922 and 1923, while German inflation was at its worst. As of the times these installments were paid to the University, their gold value had declined to 65,179 marks, or to less than one per cent of their original value, and by December 18, 1923 the entire endowment of nearly eight million marks was worth in gold less than 1/1000 of a mark.

This is, of course, an extreme case. The post-war inflation was very much milder in most countries — as, for example, England, France, Belgium, and Italy. In its ultimate development, the inflation will probably prove to be very much milder in the United States.

The outstanding fact creating our currency problem of recent years was the low commodity price level following the crisis of 1929, a commodity price level that reached its low point about February 1933, the month before our departure from the old gold coin standard. The general price level of February 1933 gave the dollar at that time a purchasing power 38 per cent higher than it had in the supposedly normal year 1926. This low price level — or, in other words, this relatively high value of the dollar — was a very disturbing factor in our economic life, chiefly because of the facts that our enormous volume of long-time debts, running over one hundred billion dollars, was payable, principal and interest, in terms of these dollars, and that the face value of these obligations, therefore, did not decline as the value or purchasing power of the dollar increased and as the incomes of debtors in terms of dollars declined. In other words it required, in February 1933, a substantially greater amount of commodities and services — more bales of cotton, more bushels of wheat, more pounds of beef, and more days of labor — to pay a hundred dollars’ worth of debt than would have been required to do so at the time most of these long-time debts were contracted. This was a real burden to the debtor classes.

It should be noted, however, that while this period of declining prices, from 1929 to February 1933, increased the burden of the debtor classes, the long period of rising commodity prices from 1896 to 1920 had been continually reducing the value of the dollar in which debts were payable, and therefore benefiting the debtor at the expense of the creditor.

The decline in commodity prices and resulting increased burden to debtors just described presented a serious problem to the government, and one demanding heroic treatment, but the evidence is strong that the debt problem created by this low commodity price level was but a temporary one and therefore one requiring only temporary remedies. In other words, there was no reason to believe that there had been any fundamental and enduring changes in the long-time debt situation, or that commodity prices had come down to the depression level of 1932-1933 to stay.

The principal factors of American inflation may be divided roughly into two classes: first, the factors of deliberate and planned inflation; second, the factors of fiscal inflation. Let us consider first the factors of planned inflation.

Planned Inflation

Early in his administration President Roosevelt announced his determination to bring about a substantial rise in commodity prices. He said: ‘ If we cannot do this one way we will do it another. Do it we will.’ This was the so-called plan of reflation, which was intended to raise the price level to something like what it was during the years immediately preceding the crisis of 1929. Among the devices used by the government to accomplish this purpose the following were the more important: —

(1)Large open-market purchases of government debt and bank acceptances by the Federal Reserve Banks — a policy inaugurated during the Hoover administration. The plan was to expand the circulation of bank notes and Reserve Bank deposit credit by spending them for the purchase of these securities. From October 4, 1929, to December 31, 1933, the holdings by the twelve Federal Reserve Banks of these securities purchased in the open market rose from $431,000,000 to $2,570,000,000. They have stood at approximately the latter figure from that date to this.

(2) The devaluation of the gold dollar, reducing its gold content by 41 per cent, or to 59 cents; and thereby increasing the volume, in terms of dollars, of our four billion odd dollars of gold of 1933 by 69.3 per cent, or by over $2,800,000,000, with subsequent small additions as further United States gold coin and old gold certificates have come to the Treasury.

(3) The Administration’s silver currency expansion policy culminating in the Silver Purchase Act of June 19, 1934, which declared it to be the policy of the government that the proportion of silver to gold in the monetary stocks of the United States should be increased, ‘with the ultimate objective of having and maintaining one fourth of the monetary value of such stocks in silver.’ From February 1933 to August 1937, the silver money in circulation in the United States (dollars and certificates), exclusive of subsidiary silver coins, has increased from $391,000,000 to $1,154,000,000, or by 195 per cent. By the end of 1936 the government had acquired, under the Act of June 19, 1934, a total of 1,209,000,000 ounces of silver, but our stock of gold had in the meantime increased so much that there was still a shortage of about 1,000,000,000 ounces of silver, and we were only 307,000,000 ounces nearer the l-to-3 goal than when the Act was passed. This vast accumulation of silver, aside from the very small amount needed from time to time to maintain an adequate circulation of fractional silver coins, — our present total circulation is 345 million dollars representing 248 million fine ounces, — performs no useful monetary function whatsoever.

(4) The government’s declared cheapmoney or low-interest-rate policy, as evidenced in Federal Reserve Bank discount and open-market rates and in the interest rates charged by government and quasi-government lending agencies.

Low interest rates encourage loan expansion. Increased loans by banks result in the increase of bank deposits which circulate through bank checks. This increase in circulating bank deposits, the media with which we do over 90 per cent of our business, is an inflationary force tending to cause rising prices. It was this type of inflation that was largely responsible for the doubling of commodity prices and the cost of living in the United States that occurred during the period of the World War and immediately after.

Fiscal Inflation

The second class of inflationary factors may be termed fiscal inflation. They represent the monetization, or the practical conversion into bank notes and, more importantly, into bank deposits, of government deficits through the sale to the banks of government debt or through the making of loans by banks on the collateral of government debt.

Our national government expenditures, exclusive of those made under trust funds and miscellaneous accounts for the four years ending June 30, 1937, were approximately $31,000,000,000; the revenue received (taxes and customs) for the same period was approximately $17,000,000,000. In other words, during a period of four years in time of peace the national government spent nearly twice its total revenue receipts, representing an average deficit of about $3,500,000,000 a year, and it did this in the face of continually increasing taxes that have raised the revenue receipts from about $3,000,000,000 in the fiscal year 1933-1934 to about $5,300,000,000 in the fiscal year 1936-1937. These accumulated deficits have raised the gross interesting-bearing debt in these four years from approximately $22,000,000,000 to about $37,000,000,000, or to a figure about twice the national debt of only six years ago, and 50 per cent higher than at the close of the World War. No other important country in the world has expanded its national debt at anything like such a rate during this period of world depression.

To-day the total cost of Federal, state, and local government in the United States is in the neighborhood of $17,000,000,000 a year. Compare this with the nation’s income of approximately $64,000,000,000 for 1936 and we have a ratio of about 27 per cent.

The billions upon billions which the government has been borrowing have not been obtained in the old-fashioned way of selling government bonds to the American people, to be held by them as investments in their safe-deposit vaults. They have been, in fact, obtained for the most part by the government’s selling to the banks its own bonds and notes. The banks create deposit credit for paying the government for its bonds. This deposit credit, in turn, is checked against by the government for meeting its expenses. This is the process of depositcurrency inflation.

Of the total national government debt to-day, about $19,000,000,000, or over half, is held by our banks. Holdings of United States Government obligations, direct and fully guaranteed, on June 30, 1937, by operating insured commercial banks alone, were 133 per cent greater than all capital funds; over four and onehalf times total capital stock (including notes and debentures); and 38 per cent of all individual and corporation deposits — demand and time. This sort of thing, when long continued under an inconvertible currency system like our own, spells inflation.

This is essentially the form which inflation took in Germany after the war, except for the fact that there the expansion of circulating credit was chiefly in the form of bank notes instead of bank deposits. Concerning this inflation in Germany, Dr. Hjalmar Schacht, President of the German Reichsbank, said: ‘The German war finance consisted mainly in the Reich’s satisfying its needs as they arose by the discount of Treasury bills and bonds at the Reichsbank, the floating debt thus incurred being funded (so far as possible) twice a year by the public issue of long-term loans. . . . What the public at large, and all but a very few of the country’s economic leaders, failed adequately to appreciate was the fact that inflation on a heavy scale was the concomitant of the whole of this form of war finance.’

The notes of the German Central Bank were secured largely by German government bonds, and the bonds were payable in the notes, just as our government bonds to-day are payable at the discretion of the government in Federal Reserve notes or any other form of United States money.

Financing by Inflation Undermines Democratic Government

The usual way of paying public bills is by taxes. The bigger the bills, the higher and the more enduring are the taxes.

The public does not like to pay taxes. ‘To tax and to please,’ said Edmund Burke in his speech on American Taxation, ‘no more than to love and to be wise, is not given to men.’ It is for this reason that the usual antidote to extravagant government expenditures is public opposition to increased taxes. The basic principle of Anglo-Saxon democracy is control of the government by the people through their control of the purse — namely, of the taxes they pay. This principle becomes inoperative in proportion as a government finances itself by borrowing from the banks. ‘The red lights are put out.’

When prices rise under the pressure of inflationary forces, the costs of government likewise advance, and the government, therefore, needs continually increasing revenues; but rising cost of living, and the usual lags in wage advances, make the public increasingly resistant to higher taxes. For the obtaining of the additional revenues required to meet these growing expenses, political pressure, therefore, becomes strong upon both Congress and the President to resort increasingly to inflation rather than to heavier taxation.

This situation in a democracy is greatly aggravated during periods of economic depression, when a substantial percentage of the voting population is living on government bounty either in the form of a dole or in the form of public work relief.

Although government financing by inflation is much more burdensome and inequitable in its ultimate results than orderly financing by sound taxation, its immediate results are not so unpleasant and the public is much slower in realizing the cost of government financing effected through inflation than it is in feeling the burden of increased taxation. Financing through inflation accordingly tends to become progressively the line of least political resistance, and this policy is, therefore, all too often continued until it terminates in disaster. It is a case of ‘after us the deluge,’ and spellbinding politicians are usually not much concerned with ’post-election floods. The French, who have had extensive experience with inflation during the last two centuries, have a saying which shows more foresight: ‘The guillotine follows the paper-money press — the two machines are complementary one to the other.’ The resort of a nation to inflation for fiscal purposes has often been compared to the resort of an individual to opium smoking. The first sensations are pleasant, but the more one takes, the more he wants. The appetite grows by what it feeds upon, and the more one indulges, the weaker become his powers of resistance.

Four Years of Rising Commodity Prices

The various inflation measures just discussed, by increasing the supply of our circulating media relative to the demand, have been making money cheaper relative to goods — in other words, have been pushing up the commodity price level. That is inflation. If, for illustration, we compare prices for the latest dates for which figures are available in the year 1937 with the prices of February 1933, the last month of the old gold coin standard, we lind that the general price level has increased 32 per cent, the cost of living 24 per cent, wholesale prices in general 45 per cent, the prices of farm products 118 per cent, and spot prices of basic commodities, according to Moody’s index, 140 per cent. If we turn to a few important specific commodities we find that steel billets have increased 42 per cent, copper 188 per cent, lead 115 per cent, tin 153 per cent. The retail price of round steak in the average American city has increased 84 per cent, that of rib roast 74 per cent, of bacon 109 per cent, of lard 127 per cent, of eggs 73 per cent, of butter 5G per cent, and of flour 09 per cent. Although commodity prices in general are still below the pre-depression level, they have been rising almost continually for over four years, and during the past year the advance has been pronounced.

Among the powerful inflationary forces now pushing the price level upward, forces taking up the cheap-money slack already created and in some cases creating more slack to be taken up, are the following, which, it will be recognized, are not entirely distinct, but in some cases involve a certain amount of overlapping: —

(1)The devaluation of our gold dollar, which has greatly stimulated the world production of gold and the inflow of gold to the United States from abroad.

(2) Our silver policy, involving, as it does, an enormous expansion in the circulation of silver certificates.

(3) The government’s low interest rate and cheap-money policy, which encourage bank-deposit and currency expansion.

(4) Our heavy government deficits and their financing through borrowing from the banks.

(5) The flow of ‘hot money’ from abroad into the United States from warscared Europe, seeking security and profit in the United States.

(6) Our heavy excess bank reserves, both in commercial banks and in the Federal Reserve Banks.

(7) The prospects of rising velocities of bank-deposit circulation as business recovers from the depression.

Counteracting these inflationary forces there are four important forces: —

(1) The expansion of business, as we work our way out of the depression, which involves an increasing demand for money and bank-deposit credit.

(2) The improvement — small though it is — which we have been having lately in the budgetary position of the national government, and which is reducing somewhat the size of our annual deficit.

(3) The policy of the Federal Reserve System in providing by administrative action, taken under the authority of recent banking legislation, for the doubling of legal reserve requirements of banks in the Federal Reserve System.

(4) The government’s action — recently somewhat relaxed — of providing for the sterilization of gold imports, which prevents newly imported gold from being used as a reserve base for currency and credit expansion.

The economic forces making for inflation at the present time appear to be more powerful than the counteracting economic forces, and, despite frequent reactions, one of which we have been experiencing lately, caused chiefly by political developments at home and abroad, the prospects are strong that we are still facing a substantial period of rising commodity prices which will carry the cost of living much higher than it is to-day.

The Prospect of a Much Higher Cost of Living

How far this inflation will go before it is halted it would be rash to prophesy. The answer will be determined not only by economic forces but also by powerful political forces both at home and in the broad field of international affairs.

Between 1896 and 1913, largely as a result of the enormous increase in the world’s supply of monetary gold coming out of the newly discovered gold mines in South Africa, wholesale commodity prices in gold-standard countries rose on the average something like 50 per cent, representing a depreciation in the value or purchasing power of gold of about 331/3 per cent. During the period of the World War and the two years immediately following, practically all the world gave up the gold standard and resorted to various paper-money standards, The demand for gold accordingly fell off, and the value of gold in terms of commodities declined enormously. During that period no country in the world remained strictly on the gold standard, but the United States came nearer to doing so than any other important country.

After peace had become established, the leading countries of the world soon became dissatisfied with their various managed paper-money standards and undertook to return to the gold standard. There was, of course, nothing like enough gold ‘to go around’ at the inflated price levels of 1919-1920, so that when the movement to return to the gold standard began to get under way there was a great slump in the inflated commodity price levels of the war and early post-war periods. But from 1923 to 1929, contemporaneously with an increasing gold production and with many improvements in currency and banking systems involving large economies in the use of gold, most of the leading countries of the world returned to the gold standard. Gold supplies were ample to meet the demand, and as a result the commodity price levels in gold-standard countries during the period of eight to nine years ending in 1929 were remarkably stable.

There is good reason to believe, therefore, that the level of commodity prices prevailing during these eight to nine years ending in 1929 was a reasonably normal one for post-war conditions.

The world economic crisis beginning in 1929 smashed business confidence nearly everywhere, caused a catastrophic decline in commodity prices, and led to a world-wide scramble for gold. Gold is a commodity that represents a large value in a small bulk. It is the commodity in which people have the most confidence in times of panic and depression, and in such times it performs well the function of a storehouse of value. In times of crisis, governments, banks, corporations, and individuals all hoard gold. The total stock of monetary gold in the leading countries of the world (in terms of old dollars) was 14 billion dollars in June 1937,2 as compared with 10.3 billion dollars in October 1929, when the economic crisis struck us. In other words, the world has 36 per cent more monetary gold to-day, when the great majority of the leading countries are off the gold standard, than it had when most of them were on the gold standard.

Such hoarding creates an artificial demand for gold and pushes up the value of gold in terms of commodities — or, in other words, pushes down commodity prices — in gold-standard countries. This high value of gold or comparatively low commodity price level, being largely due to a panic-stimulated fear, to a scramble for security, is of a temporary character. When the world economic depression is over and confidence is restored, this world-wide scramble for gold for hoarding purposes will disappear. Gold will then flow back into more active monetary use and its value will then depreciate again, in my judgment, at least to as low a level as that prevailing during the years immediately preceding the crisis. In other words, the commodity price level in gold-standard countries, as measured in ounces of gold (that is, in gold by weight instead of in devalued monetary units), will rise at least as high as it was during the eight to nine years of comparatively stable commodity price level ending with the crash of 1929.

If we assume that, when the present crisis-stimulated world scramble for gold passes, the value of gold, or its purchasing power over commodities in the markets of the world, will return to what it was in the supposedly normal pre-depression year, 1926, then our conclusion will be as follows: —

Countries which during that period debased their gold monetary units, and which maintain a gold standard, will experience increases in their price levels, above the levels of 1926, proportionate to the debasement of their respective monetary units. If, for example, between 1926 and the time under consideration the gold content of a monetary unit had been cut in half, commodity prices would be doubled as compared with the level of 1926. In the United States we reduced the gold content of our dollar by 41 per cent, making the new dollar the equivalent of 59 cents of the dollar of 1926. This debasement should give us an increase in the commodity price level of 69.3 per cent above what the level would have been had we retained our old ‘100-cent dollar.’

If we increase the National Industrial Conference Board’s cost-of-living index of 1926 by 69.3 per cent, we have an index number which is 98 per cent above the corresponding index number for August 1937. Similarly, if we increase the wholesale price index number of the Bureau of Labor Statistics of the year 1926 by 69.3 per cent, we have an index number 96 per cent higher than the present one.

In other words, on these very conservative assumptions which I have made, when the slack we have already created has been taken up we may reasonably expect that the cost of living and the wholesale price level will be something like double what they are to-day.

Bear in mind that these estimates are made upon the conservative assumptions (1) that the gold standard will be retained in the United States and the other countries which now have it; (2) that the leading countries of the world which are now off the gold standard will return to that standard; (3) that we will not further debase our own gold monetary unit, but will continue with our so-called 59-cent gold dollar; and (4) that we shall very soon balance our budget.

If, however, our government should persist in its cheap-money policies and should continue to run heavy deficits of the kind it has been running in recent years and continue to meet these deficits by increasing inflationary borrowing from the banks, our present 59-cent dollar, or any other dollar we might establish, would break down, and we should be in grave danger of experiencing a flight from the dollar accompanied by a run-away inflation of the type many countries of Europe suffered after the World War.

The prospects are strong, therefore, that we are now experiencing an upward swing of commodity prices, which, with minor interruptions, will ultimately carry the price level much higher than it is to-day. The inflationary forces that will push up the price level have not yet got into full effect, and we are now in the temporary period of monetary and credit glut and resulting low interest rates which usually precedes a strong upward movement of commodity prices — a movement that is usually followed by advancing interest rates.

The present situation is in many respects like that of the year 1915, when interest rates were low because of the temporary redundance of moneyed capital and before the great, World War, upward movement of commodity prices and interest rates had got into swing.

Speaking in 1921 of the situation that developed out of our government’s World War policy of artificially depressing the interest rate by glutting the market with moneyed capital, with the primary object of maintaining a favorable market for government bonds, I said:

As a matter of patriotic duty bankers were expected to expand their loans and deposits. . . .

The demands of patriotism were looked upon as requiring the public to avail themselves to the limit of the liberal loan facilities made available by the banks. . . . ‘Borrow and buy’ was a widely used slogan in the first three Liberty Loan campaigns, and was strongly, although more quietly, urged upon the public in the fourth Liberty Loan and the Victory Loan campaigns.

In their laudable desire to keep interest rates low on bank loans to essential war industries, and, more importantly, to make possible the flotation of large government war loans at excessively low rates of interest, the Federal Reserve authorities adopted a policy of low discount rates for Federal Reserve Banks and of preferential rates and great liberality for advances made on the security of government war obligations. . . . This policy greatly expanded deposit credit. . . . We bought our low interest rates on government paper at the price of very high prices for commodities. We kept interest rates down by a policy that kept pushing the price level up.

This is essentially the policy we have been pursuing for several years. It has been recently emphasized by the desterilization of 300 million dollars in gold and a reduction of Federal Reserve discount rates to the lowest point in the history of our own central banks or the central bank of any other country, with the primary purpose of maintaining a favorable market for United States Government securities. Such measures, it should be noted, are being taken ‘under a planned monetary economy’ in a period of rising commodity prices, of extremely low interest rates, and of long-continued inflow of gold into the country. These cheap-money policies are being followed at a time when the reserves of the Federal Reserve Banks are at double legal requirements and when there is only a negligible amount of borrowing from the Federal Reserve System by member banks, at a time when excess reserves of member banks are at the high figure of a billion dollars despite a recent doubling of legal reserve requirements and when the government is sterilizing approximately a billion dollars of monetary gold.

In other words, for its own fiscal purposes the government is pursuing policies intended to make money and moneyed capital more plentiful and cheaper at a time when, from a monetary point of view, both are redundant and excessively cheap. It is the old story over again of a government under fiscal pressure exploiting its monetary powers for fiscal purposes. Such a policy, when long continued, is almost certain to be disastrous both to the government treasury and to the currency. It is the usual destroyer of managed currencies, but it is, at least temporarily, ‘the line of least political resistance.’

We hear much about ‘controlled’ inflation, as if inflationary forces could be turned on and off by the government at will. The world’s experiences with inflation, however, as every student of monetary history knows, show that inflation, when it once gets well started, is one of the hardest things in the world to control. Certainly conditions in our own country are extremely unfavorable for the success of grandiose experiments in controlled inflation.

Under Inflation Financing, Who Ultimately Pays the Bill?

Inflation, we have said, by reducing the value or purchasing power of the dollar in terms of which all debts are expressed and paid, benefits the debtor at the expense of the creditor.

The idea is held in many places that the creditors in the United States are mostly bloated bondholders and the debtors are mostly farmers and home owners, struggling hard to pay their mortgage debts to these Shylock creditors. As a matter of fact, the greatest debtors in the United States (on longtime account) are not the farmers, with approximately $7,500,000,000 of farm mortgages, but the stockholders of our corporations (railway, public utilities, and industrial) with their $36,000,000,000 of bonded indebtedness; and the greatest creditors are the people who own these bonds. A large part of our bonds and mortgages is owned by insurance companies against approximately a hundred billion dollars of outstanding insurance on 113,000,000 policies, by savings banks and other banks, by hospitals, by governmental bodies and corporations in their pension funds, by colleges, by scientific, charitable, benevolent, religious, and other welfare institutions in their endowment funds, and by widows and orphans, and other beneficiaries of funds held in trust. These creditors are our most conservative investing classes — classes whose welfare is a matter of such great social importance that we protect many of them by special laws which restrict the investment of trust funds to a limited and supposedly safe field of investments. In these restrictions, high-grade bonds and mortgages are favored, and common stocks are usually disfavored. This policy is enforced both by law and by traditional public opinion.

Although all classes of securities in the United States have advanced during the last four years since we gave up the gold coin standard and debased our gold monetary unit, it is the common stocks which have advanced most and the highest-grade bonds which have advanced least. The rise in common stocks on the average, since February 1933, has been several times more than sufficient to compensate for the decline in the value or purchasing power of the dollar in which they are payable, but the advance in the prices of high-grade bonds on the average has not even been sufficient to compensate the owner for the moderate increase in the cost of living. With reference to experiences on this score in the countries of Europe which suffered serious inflation, Dr. Walter S. Landis recently declared: —

Under the laws of certain of the European countries, savings banks, life insurance companies and trustees must invest funds in their control in the so-called gilt-edge or ‘legal class.’ In general these classes consist in high-grade first mortgages, state and municipal bonds and bonds of railroad companies and other industrials of a certain superior type. The law actually required this. During a period of inflation, it is exactly these types of securities that suffer the most. . . . The law actually destroys the very foundation of these preferred savings and trust funds. . . .

In other words, the government with one hand destroyed the value of the money, which is equivalent to saying it destroyed the value of the very securities that it had required trustees, insurance companies and savings banks to invest in.

Exactly that same situation exists here in America to-day. Can you imagine anything more vicious than the Central Government in Washington destroying the values of what the several states absolutely require the trustee to invest in?

How Educational Endowments Were Affected by Inflation in Europe

Within a score of years, under the pressure of the World War and the post-war reconstruction, most of the leading countries of the world ha ve had extended experiences with inflation, and these experiences have repeated with renewed emphasis the lessons concerning inflation of many hundreds of years of world monetary history.

Let us take a few examples of how this inflation worked in Europe with reference to endowed educational and research institutions. The following are cited from a report prepared by Professor P. G. Wright under the auspices of the Duke University Endowment.


The endowment of this institution before the war amounted to about fifty million francs. The institute consists of two parts: (1) a laboratory for research, and (2) a department for the preparation and sale of products, especially antitoxins, cultures, and so forth.

Before the war the research department was supported by means of the income from the endowment, while the receipts from the sale of antitoxins, cultures, and other products prepared by the institution were impounded in a reserve which, in 1914, amounted to ten million francs, and which was augmented year after year by the sale of these products. But despite this annual increase in the reserve, and notwithstanding the fact that the investment of the endowment fund was handled with extraordinary skill during the inflationary period, the total endowment after inflation and stabilization was less than 40 per cent of its pre-war amount. . . .


This institution corresponds, from the standpoint of its curriculum, to an American high school. It was founded in 1778 by the Empress Maria Theresa, although from time to time it has received additions to its endowment fund, which by 1914 amounted to approximately eight million crowns (about $1,600,000).

Prior to the war the income from the endowment fund was sufficient to supply most of the needs of the institution; but inflation reduced this large fund so greatly that, at the stabilized rate of 14,400 paper crowns to one gold crown, it had a value after stabilization of a little more than $112 as compared to $1,600,000 in 1914. . . .


For thirty-eight inviolable endowments owned by this university covering investments in 1922 of a face value of approximately 14 million marks, the inflation losses were so great, in spite of benefits received from government revalorization of securities, that the total value in 1928 was less than two million Reichsmarks.

The Rothschild-Goldschmidt Endowment of the University of Frankfurt was established in 1913 with a capital sum of 1,000,000 marks.

The fund was administered by the trustees, according to the principles of conservative trust management, the securities chosen for investment being Treasury Notes of the Reich.

By February 12, 1923, however, the

1,000,000 marks bequeathed in 1913 had been reduced in value to 187 (gold) marks. But by December 31, 1923, after inflation had reached its greatest magnitude, the fund had been virtually obliterated. . . .

Thus, in the statement of assets published in 1929, the Rothschild-Goldschmidt Endowment was listed at 1.32 marks. . . .

Inflation and Higher Education in the United States

Over one half of our higher education in the United States is being carried on by privately supported colleges. These educational endowments alone probably amount to at least a billion and a half dollars, and they are invested largely in securities yielding fixed incomes, chiefly in bonds and mortgages.

For example, the endowments of the six privately endowed universities listed in the following table amounted to 355 million dollars in 1936, the last year for which published figures are available. Of this total, approximately 311 million dollars, or nearly 90 per cent, was invested in various forms of securities divided as follows between (1) Fixed Income Securities, consisting mostly of bonds and mortgages and a small amount of preferred stocks, which together constituted over two thirds of the total, and (2) Equities, consisting mostly of common stocks, which constituted less than one third.

In the face of our large and growing governmental control of business, in the face of increasing resort to highly progressive income, inheritance, and gift taxes on the part of both our national government and the states, taxes whose combined rates in the higher brackets are already the highest of any advanced country in the world, and in the face of the commonly neglected fact that inflation continually pushes all taxable incomes into higher and higher brackets although the real or purchasing power value of these incomes may be actually declining — in the face of such facts, who will restore the endowments of these educational institutions if they are greatly depreciated or destroyed by inflation?

Excessively burdensome government debts are usually not paid by taxation. The political resistance to taxes adequate for the purpose becomes too strong. Such debt burdens are usually reduced to politically workable proportions by inflation. The burden is thereby shifted largely from vigorously protesting taxpayers, who have votes by the millions, to bondholders and other ‘economic royalist’ creditors whose numerical protest at the ballot box is weak. In this class belong our privately endowed colleges, universities, scientific research institutions, and hospitals. In America the greatest and most irreparable damage that unsound monetary policies and government financing by inflation threaten is the undermining of these great public-welfare institutions.


Securities Held in Endowments of Six Representative Universities
University Total Securities in Endoicment Amount Fixed Income Securities
Amount Per Cent
Cornell University $ 26,521,000 $ 16,985,000 64.0
Harvard University 111,587,000 80,599,000 72.2
Princeton University 27,370,000 22,186,000 81.1
Yale University 79,330,000 50,240,000 63.3
University of Chicago 44,303,000 29,596,000 66.7
University of Pennsylvania 21,969,000 13,500,000 61.5
Totals 311,080,000 213,106,000 68.5
University Equities
Amount Per Cent
111 3333 4444
111 3333 4444
111 3333 4444
111 3333 4444
111 3333 4444
111 3333 4444
111 3333 4444
111 3333 4444
  1. This article is a revision and amplification of an address, ‘Inflation and Higher Education,’ given by the author at Harding College, Searcy, Arkansas, April 6, 1937.
  2. The world’s gold production increased rapidly soon after the war. — AUTHOR