Harvard vs. Yale, Economic Edition, 1980: A Tribute to John Train

My recent Harvard vs. Yale obsession (which never occupied me at all when I was in college) has reminded me of John Train, one of the greatest investors on investors. I first read his books on investors when I was about eighteen and, to use the cliche, they changed my life. Perhaps it's more accurate to say they revealed what my life's path would be. Sitting here 13 years later with his books in front of me, it's gratifying to realize that by combining the study of investors with writing about them for a non-expert audience, I'm in my own imperfect way trying to emulate him.

I hope I'm forgiven for copying the following timely excerpt, taken from the chapter on State Street's Paul Cabot in Train's update of his earlier books, "Money Masters of our Time":

One of Cabot's finest hours came in 1972. For several years, McGeorge Bundy of the Ford Foundation had been calling on American colleges to invest their endowments aggressively so they would grow faster, and then to live dangerously not just on the income but also on the market appreciation--including what the market appreciation ought to be in a bull market. Heady times! In those days American companies paid out a much higher proportion of their income as dividends than they did later on, when income was deployed for stock repurchases and corporate acqusitions. And of course the capital value of bonds was continuously eroded by inflation. So actual income was the most you could prudently spend.

The Ford Foundation is the chief private source of largesse for American universities, and sounds awfully money-wise to a board of trustees in Savannah, Georgia. When its call came there were many who felt they had better string along. The Ford Foundation's pronunciamento came in the euphoria of a bull market, and it lured a significant number of American institutions of learning onto the rocks. Yale succumbed; Harvard, yea, even Harvard, was tempted. The president and fellows started wondering if there might not be something to it.

Across the Charles River, over in Boston, Paul Cabot blew his stack. No longer Harvard's treasurer, he fulminated an open letter to the president of the university that promptly attained circulation among the governing bodies, the faculty, and the alumni. It is still vividly remembered both in educational and in investment circles.

Here is the text (minus some statistics and examples):

Dear President Bok:

I have heard that you and other members of the Harvard Corporation are considering the use of capital for current expenses (specifically part of capital gains) in addition to your present policy of using all of income on the endowment funds of the University.
The purpose of this letter is to dissuade you from adopting this dangerous, unfair, unwise, and possibly disastrous policy.
Ever since Harvard was founded in 1636, we have had (other than for short periods) higher prices and a declining value for the dollar, i.e., inflation. I guess that you and the other members of the Corporation would agree with me that this will continue in the future, regardless of rather futile attempts which, at best, may only slightly slow the present rather rapid rate of inflation.
Unless Harvard and other institutions and individuals recognize this and prepare for it as Harvard has done in the past, the results in the future can indeed be diastrous. If one spends capital, obviously, there will be less in the future to earn money on. It really amounts to robbing the future to take care of the present. Of course, this procedure is tempting to any present incumbent. He'll probably be dead or out of the picture long before the inevitable fallacy of such a policy comes home to roost.
Your two predecessors as President of Harvard, with whom I served, always backed me one hundred percent in refusal to spend capital. Indeed, the income we "availed" ourselves of was, in fact, less by a few million every year than the income earned.
As of June 30, 1948, the market value of Harvard's General and Special Investments exceeded Yale's by approximately $100 million. At the end of fiscal 1971, the approximate market value of these funds were: Harvard, $1.3 billion, and Yale, $547 million. Harvard's investments were three-quarters of a billion larger than Yale's! What caused this? Capital gifts to Harvard were bigger during this period but not enough so as to account for this wide difference. Investment policy had most to do with it, but very important was the fact that Harvard saved money every year whereas, in many years, Yale dipped into principal. Yale now has a policy of doing so regularly. This unfortunate policy is disguised and made unclear by a formula of mathematical hieroglyphics. The simple fact is: it is Yale's policy to spend principal . . .
There are other important reasons not to rob the future to make life easier now. The effect on donors and bequests could be very bad. Most givers of endowment funds assume and expect (and indeed sometimes legally specify) that the principal they give shall be maintained, not dissipated . . .
Finally, I beg you and the other members of Harvard's governing boards not to be a party to the slow strangulation of Harvard's goose that has laid so many golden eggs over past years.
I am giving this letter as much publicity as I can in the hope that it will induce alumni and friends of Harvard and Yale to beg the former not to go down this dangerous and probably disastrous road and the latter to return from it.

Sincerely,
Paul C. Cabot

Cabot won that battle. Common sense and tough experience again prevailed. The Harvard-Boston tradition has not only won out over the Yale-New York tradition, but has assured its superiority for generations. That means better-endowed chairs for Harvard, more scholarships, bigger libraries, a brighter collection of talent, more useful impact on America and the world. But beware complacency, Harvard!

When the market crashed, many colleges discovered that they had geared up their budgets to an expectation of capital gains that, far from rising as hoped, collapsed. Many endowments, including that of the Ford Foundation itself, which believed its own propaganda, sufferred crippling losses during this period.

Comments

[Socialism c...:]

"That means better-endowed chairs for Harvard, more scholarships, bigger libraries, a brighter collection of talent, more useful impact on America and the world. But beware complacency, Harvard!"

Hah. Good enough until that paragraph. Preserving capital for the future is obviously the right move, and one that our debt-loving government needs to learn!! But "brighter collection of talent" at Harvard??? "...more useful impact on America and the world"??? No. Harvard is known as "the Kremlin on the Charles" for a reason: its school of economics is decidedly Socialist...and we all know Socialism *does* *not* *work*!! Current socialist bailouts are more of the same socialist policy that Cabot warned about -- spending now at the expense of future generations. And who has brought us these bailout policies? Harvard alums.

2008 Dec 19 12:49 PM

[JE'87:]

Re: "Harvard is known as 'the Kremlin on the Charles' for a reason: its school of economics is decidedly Socialist...and we all know Socialism *does* *not* *work*!!"

I'm not sure which Yale you attended, but when I learned economics at Yale, it was from the likes of James Tobin, Arthur Okun, William Nordhaus, and others who collectively represented what was then called the "Yale School." The Yale School represented ardent Keynesians, some of whom were proudly responsible for pushing through the first (quite successful) tax cuts and deficit spending in response to early signs of a recession during the Kennedy administration. The medicine worked, and the prescribers widely praised.

I don't recall there being a "Harvard School" in those days; it seemed that our primary competition came from Chicago and MIT. But in ranking the support for a hands-on government approach to guiding the macroeconomy, I don't think anyone would have put Harvard's economists in front of Yale's.

Since those days, we have learned a lot more about monetary policy and international funds flows, but the fundamental laws of Keynesian economics have yet to be repealed. From the writer's screed, it would appear that the fundamental flaws in Yale's admissions process continue to persist as well.

2008 Dec 19 01:37 PM

[bobace:]

Agree with JE'87 Dec-19-08 01:37 PM - especially former Harvard Professor Tobin. If it were not for the Keysians (including Harvard's J.K. Galbraith) the US may have become a lesser nation: a Dickensian state more divided between have and have-nots than today. The current state of affairs was founded on Reaganomics - supply-siders, low taxes, higher deficit (resulting from low taxes) and deregulation of market participants. It was the deregulators that started the Wars on WMDs and Terrorism that will likely equal or exceed the $700 Billion TARP. Ideology on the right and left are equally dangerous. We can decide to rebuild a better economy through real-economy planning (New Deal) or sacrifice millions of poor and powerless people.

2008 Dec 19 08:30 PM

[mr clark:]

some of the biggest ripoff crooks have come out of Harvard and Yale, but i'd have to go with yale for grooming the modern day pirates that are the scourge of the earth...

2008 Dec 20 04:30 PM

[Moon Kil Woong:]

Harvard is fine by my book. Galbraith was worth all the bad economists that ever came out of those doors (not to say that harvard makes more than any other given college). Every student can't be a genius.

2008 Dec 24 01:38 AM

[beentheredo...:]

Deficets were a direct result of increased spending not reduced tax revenue. Actual tax receipts increased during the Reagan years, but spending increased at a much faster rate. Basic law of nature...TAX SOMETHING YOU GET LESS OF IT, SUBSIDISE SOMETHING YOU GET MORE OF IT.


On Dec 19 08:30 PM bobace wrote:

> Agree with JE'87 Dec-19-08 01:37 PM - especially former Harvard Professor
> Tobin. If it were not for the Keysians (including Harvard's J.K.
> Galbraith) the US may have become a lesser nation: a Dickensian state
> more divided between have and have-nots than today. The current state
> of affairs was founded on Reaganomics - supply-siders, low taxes,
> higher deficit (resulting from low taxes) and deregulation of market
> participants. It was the deregulators that started the Wars on WMDs
> and Terrorism that will likely equal or exceed the $700 Billion TARP.
> Ideology on the right and left are equally dangerous. We can decide
> to rebuild a better economy through real-economy planning (New Deal)
> or sacrifice millions of poor and powerless people.

2008 Dec 27 12:34 PM

[johngonole:]

The problem with Keynesian economics is that they seek to make employment steady by increasing government spending in hard times. Problem is that they never decrease spending when times become good again. This results in an ever growing size of government which poisons the economics of nations. By this I mean a larger and larger percentage of our labor resources are wasted in nonproductive jobs. Further the deficit spending keyensians cause inflation because the deficits are without end.

The supply siders seek to help employment and the federal deficit by reducing tax rates. The reduced taxes lead to more PRIVATE spending versus government spending. That spending leads to more REAL job creation. At the same time however the problem seems to be that in good times the govt spends even more securing another bad budget with high deficits. This too leads to some of the same problems caused by the Keynesians.

In a perfect world the size of govt would reduce as the private sector expands. As the size of the private sector expands the size of public govt would reduce. The result would be smaller ups and downs in the economic cycle yet would preserve the natural 2-3 year cycle frequency.

The Keynesians and even free spending supply siders have sucessfully lengthened the economic cycles to 8-10 years however they have failed to make the ups and downs smaller. So we go from manic markets to depressed markets. Capital is destroyed via bad loans and/or inflation. Welfare and Statism are the cure peddled by politicians to the masses.

To the gentlemen above who was pushing for the Grand new deal wake up. Much of what has plagued this economy and previous economies are indeed the fascist and socialistic institutions and laws created by the New Deal. Obama is the farthest thing from change and his stimulus plans will probably look more like the OLD Deal.

New would be government workers actually doing real work for more than 3 hours a day. New would be a growing private sector. New would be putting men in jail who have stolen billions or millions in jail longer than the guy who stole $20000 or $100000. New would be a guy who decreases the reach of our militarism. New would be someone who doesn't want to mimic the failed policies of our cold war foes or take us back into the dark ages of economic thinking.

I'm sorry but Socialism Can't compete is absolutely right about what he said concerning debt. Debt levels are the problem. Transfering debt to the govt, or creating new debt isn't going to help in the long term. Our Grandchildren will suffer for it.

Jan 10 02:24 AM

[D. McHattie:]

Classic discussion.

It's funny to watch ivy-leaguers quibble about whose faculty won the popularity contest, who is more well-known as reflecting conventional wisdom when it has been the adherence to their doctrines that has lead us to the current crisis.

The important fact contained in this article is that Harvard's endowment is larger and it is a direct result of refusing to dip into their capital. What they have done with it has nothing to do with whether it is the wiser policy.

So what is the lesson here for Obama's ivory tower braintrust charged with directing economic policy?

As a country, we have not only 'Yaled' our way through our national endowment, but are in the process of absolutely beggaring future generations by preserving, through bailouts, an economic structure based on the misallocation of resources.

Why anyone would want their alma mater associated with such a failed economic dogma is beyond me.

Jan 19 08:49 PM