Knowledge that Transforms

PERHAPS one of the special investment problems of the state university is to become more like the successful endowed colleges in its attitude and operations. I shall not limit my remarks to this one statement, but I think it may be central. The problems of a state university in investment matters differ from those of the endowed colleges in several respects, which are intermingled in their effect. These may be briefly stated as the size of the fund, amount of legislative control, federal obligation, and obligations to a different ownership. It is quite possible that the general form of legislative control or the activities of the university itself in its investment matters may stem from the first Morrill Act, sometimes called the Land Grant Act, of I862. By that Act, each state, or through each state the university designated as a state university in each state, was given 3o,ooo acres of public land for each senator and representative, and the provisions of the sale of this land were set forth. Quite probably this was the first endowment of many of the state universities. Indeed, many of the state universities did not exist in I862, and those which did exist were small in size. The endowment created by this grant was required to be invested in bonds of the United States or of the states, or in some other safe bonds. If the state had no bonds, the legislature could direct the investment in any manner which would yield a fair and reasonable return on investments, and the principal thereof was to be forever unimpaired. It is quite apparent that this set the general pattern for the investment of state university funds, and state governments which had legislative control over all the affairs of the university have been slow to release this restriction. And, in general, they have not released the restriction insofar as it affects the money received from this particular grant. As time goes along this ceases to be a significant matter with the larger state universities. For example, in the case of the University of California, the socalled Federal Endowment Fund of the proceeds of this land, together with the proceeds from two other smaller grants, now represents only a little over i per cent of the total book value of the permanent endowment fund. Whether or not these funds are kept invested in bonds does not have a significant effect on our university, but it does have a very significant effect for many of the other universities. The annual report by Vance, Sanders & Company entitled Brevits, which lists college endowment funds, lists only ten state universities. Provided Cornell University, which is the state university in agriculture and a few other departments, and the University of Pennsylvania, which receives some support from the state, are not regarded as state universities, the number falls to eight. Another which should be eliminated is the University of Texas, which has benefited so much from its west Texas oil lands that it has a fund larger than any other state fund. The University of Illinois should be omitted, since it does not have a large fund compared to the funds represented here. Finally, Rutgers was mentioned, but it was formerly a private university and probably has not had the influences that have been brought to bear upon the investments of the other state universities. With these eliminations, the information presently at hand would indicate that there are perhaps only six state institutions of higher education that have endowment funds exceeding $io million. The pattern of state fund investments is therefore controlled in large measure by size. The small size of most funds is probably chiefly responsible for the control exercised by state authorities and the historical limitation to the investment in fixed income securities, and then largely in governmental securities of national and state origin. This in turn points back to the influence of the grant from the government in support of the Morrill Act. State control of investments is diminishing in institutions with $5 million or more of investment assets. It seems that the smaller funds are inclined to hold a smaller percentage of equity investments, and in these cases real

accounting is based upon evaluation of the real intersectoral flows of goods and services, far as possible, at market prices, market prices meaning either the prices received by the local seller or the prices paid by the local purchaser.' Apart from other exceptions which are not of immediate interest here, this principle seems to have been abandoned in the case of imports and exports. Apparently in order to preserve consistency with the balance of payments, imports are generally evaluated c.i.f entrance port, and exports f.o.b. leaving port. Any indirect taxes and subsidies incident on imports and exports are recorded, together with indirect taxes and subsidies on domestic flows, as flows between gross domestic product and the governmental accounts.2 This treatment seems to make the national accounts less useful for purposes of dynamic analysis, in the sense of examining the buyers' choice between imports and domestic products, and local producers' choice between domestic and export markets: the purchaser of imports compares their local market prices with the prices of domestic products, and the potential exporter takes into account any taxes and subsidies on exports when deciding what part of his output to export.3 If this treatment seems unsatisfactory for the accounts of any country, this is a fortiori the case for countries with multiple exchange rates. Multiple rates are frequently not explicit but are actually effected by differential taxation or subsidization. But even in those cases where they are made explicit the deviations from the basic rate can be conceived as indirect taxes or subsidies. The treatment of multiple exchange rates in national accounts seems to have been dealt with only from the point of view of how to arrive at constant price estimates.4 But when the accounts are reduced to base-year prices they disappear to the degree that their rates deviate from those of the base year. It follows that for countries with multiple exchange rates, national accounts at current prices are more revealing than at constant prices. Differential exchange rates are established for particular commodities, or groups of commodities, whereas national accounts are built up from sectoral transactions. It is, therefore, necessary to distinguish purchases of imported goods and services within the purchases of each sector, and to compute the weighted average effective exchange rate for the import component of each sector. In the simplified examples shown below the sectors are identical with the three final-product categories of the gross product account: consumption, gross domestic investment, and exports. Thus if intermediate sectors are not represented in the system, the import components must comprise, besides the direct purchases of each sector from abroad, also indirect imports * This article was completed in March 959, so that it does not contain references to papers by William I. Abraham of the United Nations and Graeme S. Dorrance of the International Monetary Fund, which were issued as drafts subsequently and apparently have not been published so far. I would like to acknowledge gratefully valuable comments by Dr. S. J. Prais, now with the International Monetary Fund, and my colleague, Susanne Freund. 1 United Nations, System of Accounts and Supporting Tables (New York, 953), 8. 2Ibid., i8ff. As far as we know the only exception is the United Kingdom Blue Book on Income and Expenditure, issued annually by the Central Statistical Office. See, for example, in the I956 issue, page 9, Table I2. In this document imports include taxes levied on them; and gross product, national and domestic, excludes these taxes. 'A strong case for the inclusion of import duties in import values was made by J. L. Nicholson, National Income at Factor Cost or Market Prices? Economic Journal, LXV (June 1955), 2I6 f. The discussion between Nicholson and Burton (which concerned the consistency of the British official series of GDP at I948 market prices and factor cost with the series at current prices), as well as Nicholson's later discussion with R. L. Sammons, seems to have left unshaken Nicholson's basic argument in regard to the evaluation of imports and exports as affecting the analytical value of national accounts. The statistical side of these disputes is of no interest in our context. Cf. H. Burton, Expenditure Taxes, Imports and Gross Domestic Product at Market Prices, Economlic Journal, LXVII (December 1957), 644-54; J. L. Nicholson, Duties and the Gross Domestic Product at Market Prices, ibid., LXVIII (June I958), 39396; H. Burton, Duties and the Gross Domestic Product at Market Prices: Rejoinder, ibid., LXVIII (September 1958), 585-88; R. L. Sammons, A Note on the Treatment of Import Duties and the Gross Product, ibid., LXVIX (June I959), 384-87, and Nicholson's reply, ibid., 388-go. 'See United Nations, Economic Survey of Latin America, I95I-I952 (New York, I954), 33-35.

Rexford G. Moon, Jr., Equalizing Opportunity Under Higher Charges, The Review of Economics and Statistics, Vol. 42, No. 3, Part 2. Higher Education in the United States: The Economic Problems (Aug., 1960), pp. 52-54