(The following is the second part of a research project prepared by Jeff Seder, a junior in Dunster House, and David Labaree, a doctoral candidate in Social Relations. The CRIMSON welcomes opposing interpretations and responses to the articles.)

IN the first part of this article (CRIMSON, Dec. 18) we showed that Harvard College's admissions are biased in favor of upper and upper-middle class students. Preppies are favored even though as a group on applying they have poorer academic records, and lower S.A.T.'s. Later, after acceptance, they have lower rank list predictions.

We also showed that this bias was reflected in the present composition of the student body. We used large, federally funded, computerized surveys of Harvard College over a 5-year period in out research. Among the variables were family income and type of secondary school attended.

To some extent the Harvard administration seemed to explain this bias as a conscious reflection of an educational philosophy. Harvard was to train the leaders of tomorrow. Its glory was partly its mix of gentlemen and scholars. There was the expression of a conscious attempt to maintain the University's institutional power and prestige by placing itself at the service of the American ruling elite.

But the administration offered another, not unrelated, justification: Harvard can not financially afford to do it any other way, and is therefore forced to rely on those people who can afford both to pay for their own education and to contribute heavily later on in life. If this claim is true--if in fact Harvard cannot afford to lower its fees--then there is little hope for a more heterogeneous student body in the future. Obviously, our attention should shift to the University's financial state.

WE CONCLUDE that Harvard could indeed afford to lower its fees. A condsensed form of out argument follows. It shows that:

* The rate of increased costs of Harvard has been misrepresented.

* Harvard's endowment is growing faster than rising costs.

* Much of the income on the endowment is not spent.

* Much more income is available than is now supposed because of unused or unregistered capital gains, partly explainable by Harvard's accounting system.

* Abolition of tuition is a possibility.

To begin, an often quoted figure is that the University's expenses have tripled in the last ten years. This is misleading because during their period government contracted and funded research rose eight-fold to 55.4 million dollars. This cost Harvard virtually nothing but it makes the budget look much bigger and distorts how much costs have really risen. Delete this amount and the real (non-governmental) expenses increased by 122 per cent, not 200 per cent (from 43.2 million dollars to 96.0 million dollars).

What are the funds that cover each budget, whatever its size? The total market value of Harvard's general investments on June 30, 1967 was about $1,038,000,000. The "book value" was about two-thirds that amount. Each year the Corporation votes to distribute to each of the funds participating in the general investments account (which means mostly the endowment funds) income from this account at a fixed rate of the book value of each fund. In 1966-67 this rate was 5.2 per cent and thus $34,000,000 was distributed, of which $30.5 million went to endowment funds and paid for 32 per cent of the University's expenses for the year. Meanwhile, $33.1 million was collected from student fees. Of course, the real rate of distribution was not nearly as high as 5.2 per cent.

The market value of general investments in June, 1966 was $974 million. So the usable rate of return established by the Corporation was actually more like 3.5 per cent. Yet this figure doesn't even approach the return the Treasurer is really receiving on his investments. According to both Treasurer Bennett and President Pusey, Harvard's investments net about 10 per cent a year computed on their market value. This figure includes both dividends and interest and value appreciation on the market.

What this means, in short, is that Harvard is only spending about one-third of the income from its endowment. The bulk of the income is reinvested, or more precisely, remains invested in the form of unregistered capital gains. Why is the Corporation so stingy wiht its money, while students fees are having such a dramatic effect on the makeup of the student body?

Harvard going Bust?

Mr. Bennett himself -- Harvard's Treasurer -- provided one answer in an interview with the CRIMSON last April 22 ('68):

Whenever a new project stalls for lack of funds, a cry rises to the effect of "Well, if we're worth a billion dollars and we have the largset endowment of any private university in the country, why can't we spend a few puny millions to build . . ." a new athletic building for instance. That billion is capital (Bennett stressed), and once we start cutting into capital we're going to get busted.

All that the university can spend from its riches for the fiscal year 1967 is the $30-40 million it will realize in income.

By income Mr. Bennett is referring to dividends and interest which that year amounted to a little more than predicted--$42.5 million. Yet not even all of this was spent. Two and one-half million was transferred to the principal of the endowment funds and another six million stayed in a fund entitled "Investment income reserved for future distribution," which is Harvard's way of saying that the money was just reinvested. That reserve fund, in fact, is an excellent example of income disuse; it has grown 2,590 per cent since the end of the Second World War (or more than four times as fast as the value appreciation of the general investments) so that it now amounts to more than $64 million.

Saving and More Saving

Bennett used the word "busted" then to mean that Harvard would risk insolvency in the future if it spent any of its capital ganis (or even all of its dividends and interest?)

But is it true that if the Treasurer started cutting into anything more than the dividends and interest from his investments, he would "get gusted"? Not in the legal sense, certainly. In the first place, according to an official in the Treasurer's own office, only about 40 per cent of the endowment is restricted to principal. The other 60 per cent could be spent in its entirety if the Corporation saw fit. Yet even for that part whose income, by the terms of the bequest, is all that can be used, the principal is legally defined as only the original amount of the gift and certainly not the market value of the stocks bought with it. Thus, even a fund restricted to principal could be delivering spendable income at the rate of 10 per cent a year, if the Corporation wanted to spend it.

A recent Ford Foundation study called "The Law and the Lore of Endowments" chided colleges for not using their capital gains and for their investment policies. One of its recommendations was that colleges in doubt, but wanting to use those gains, should file suits to have their capital gains classified as income (front page, N.Y. Times, April 23, 1969).

The emphasis in Harvard finances on saving reflects the belief that the billion dollars must grow as a protection against future higher expenses. Everyone is forced to save.

The Corporation sets the example by not distributing the bulk of the income from the endowment, but each department follows suit by cautiously not spending all of the income allotted to it. The Faculty as Arts and Sciences, for example -- although the hardest hit by the financial squeeze from the top -- has still managed to save a little. It has a fund for unexpended income amounting now to $3.2 million. And during the last ten years it has only had two in the red; the rest delivered a quite comfortable margin.

In fact, in this period the Faculty had a total net surplus (income over expenditures) of over $8 million. More than four and a half million dollars of this was transferred into the principal of the endowment and most of the rest ended up in various reserves and loan funds.

Even last, year, when the Faculty ran its much-advertised deficit which depleted the departmental credit balance by $131,000 and thus "necessitated" an increase in student fees, it shifted nearly twice that amount from the balance into the endowment (invested it), still leaving almost $600,000 unexpended endowment income for the year.

The reationale behind all this saving is that the maximum which prudence allows is being spent from endowment income. Taking a larger share of the load not borne by fees would be, on the long run, suicidal. Is this true? From the end of the Second World War to 1967, the market value of the general investment almost sextupled, which means an average increase of about 8.4 per cent a year compounded. This annual rate of increase is made up mainly of value appreciation but it also includes gifts for capital and undistributed "income." Put in more general terms, the investments have increased about two and one-third times every ten years, which leads us to predict that by 1977 they will be worth about $2.4 billion. Isn't this enough -- perhaps even more than enough earning power for the long run? To answer this, we will calculate the long term effects on the investments of increased immediate expenditures and proportionately less saving.

Why Not Abolish Tuition?

Tuition for Harvard College is to be raised $400 next year. Yet, if the college were completely to subsidize student fees for the next ten years, and if the investments grown at a rate similar to that of the last twenty years (taking into account the fact that much less would be reinvested each year than before) the present billion dollars would become $2.2 billion by 1977. This would hardly leave Harvard financially "busted."

Perhaps ten years is not long enough to tell for sure what the ultimate effects would be on the University's finances. What about the "needs of the 'longer long term?" In fact, with real expenses rising linearly and the investments rising exponentially, Harvard cannot lose over time by allowing the endowment to shoulder more of the burden which student fees now carry.

In the first years during which fees were subsidized, the growth rate of the general investments might be cut back to 6.5 per cent, but this rate would gradually grow back toward the original 8.4 per cent. (The full version of the financial research is available.)

But against such a policy is an argument not yet touched on which is expounded by the University at great length in the booklet on its resources. In itself, the argument comprises the keystone motto of Harvard's institutional ideology: "Every tub on its own bottom." What this means financially is that each department of the University must be self-supporting. Harvard put it this way:

Every tub on its own bottom. The university . . . will given all the help it can. Yet the choice that faces all Deans or Department Heads is clear: in respect to any new programs, either find new resources, or go without. In respect to the increasing trend of operating expenses, either find new rseources or curtail program.

If the University does provide help, it is not in the form of a gift but of an interest-bearing loan.

There are a number of problems with this policy. For one thing, it forces the University to judge academic departments by financial criteria, that is, how much money they can draw in for their own support.

Further, although each dean is supposed to dig up his own resources of support, he cannot completely control his own expenditures. Rather, the Corporation decides each year what portion of the income from his faculty's endowment he is to be allowed to spend. And as has already been shown, this apportionment is somewhat less than generous.

The last justification of Harvard's stinginess with its endowment funds is that most of these funds are restricted by the terms of the original bequest to specific faculties and within the faculties to specific projects.

In fact, however, there are substantial unrestricted funds around. In 1967, for example, nearly one-third of the $38-million given to the University was totally without qualification. And the best estimate from University figures indicates that over one-fifth of the total endowment or about $200 million is unrestricted funds. So the University has a pretty big tub in its own right, which could, it would appear, be used to fund faculties in financial trouble (without charging interest).

Summary

In the first installment I showed that Harvard's student body is remarkably undiverse. It is decidedly weighted toward upper incomes and upper classes. The two reasons for this were shown to be: (1) the high cost of coming to Harvard and the increasingly inadequate scholarship program, which de facto discriminates against lower and middle income groups; and (2) conscious admissions policies. The first of these arguments is entirely, and the second partially, based on the assertion that Harvard is caught in a financial squeeze which means it must accept largely people who can pay for their education now and can support the University in the future. But the long discussion of finances which followed--showed that Harvard is not poor at all. It does not need to admit people who it feels will support it in the future, i.e., preppies. It does not need to raise its fees $400 next year. In fact, in his full article Labaree argues that Harvard's endowment, far from forcing constant fee increases, could withstand complete and permanent elimination of student fees for undergraduates.

Besides, whether students believe free tuition is possible or not, there is another point that remains. Students should no longer accept the platitude that they must pay more because of increased costs. We have indicated how the budget figures showing increased costs have been skewed by including increased government research costs in them. Such research was government contracted and funded and so was really virtually free to Harvard.

Second, the University does not know what it "costs to educate" the average student. Their tuition figure is not based on any such figure. In fact, they admit they have no way of even determining such a figure as the cost to educate the average student. Harvard has many sources of income of which tuition is one small one. Students may already pay more than "it costs to educate them." That is, already one should visualize the tuition as going into a general fund used to support what the Corporation calls the "University." That complex may then exist and thus give one the opportunity to benefit from the use of a few of its myriad functions and facilities. What share a student should pay to perpetuate the entire community is a somewhat arbitrary decision. Right now I feel it is based on a hierarchy of priorities that drastically needs reassessment. And for those costs that are increasing it should be shown why students should bear those increased costs!

Meanwhile, the student fees are already so high that they are pereptuating the pattern of an education of an elite. They do so by discouraging all but elite from even applying. This saves Harvard the trouble of having to more blatantly put into practice the biases in admissions that favor those with the advantages of "nature and inheritance," i.e., preppies, and sons of those "ruling." Yet even after the screening done by high fees the college still applies economic arguments to those applications that are received in order to justify favoritism to preppies (40 per cent of each class). They say they need the tuition and the potential later financial support.

Without these financial arguments the high fees and admissions process would be seen as glaring bias and pressure might build to turn Harvard into a merit-based institution. That would be the sort of place, as Dean Bender pointed out, which the two Roosevelts would hardly have been "admitted to or would have wanted to enter. . . . " This last, of course, is crucial. Bender makes it quite clear that -- financial arguments aside -- Harvard perceives as its purpose the education of the real leaders of tomorrow. And with firm sociological insight, it recognizes that potential leaders are most likely to be, by the process of "inheritance and nurture," the children of those presently ruling (or leading, depending on your politics).

The passage we kept by two sturdy porters named Riches and Poverty, and the latter obstinately refused to give Entrance to any who had first gain'd the Favour of the former ..." --Benjamin Franklin, 1772, Dogwood Paper No. 4