Good, clear information about how finances work is as hard to come by as an honest man. Good, clear information about how Harvard's finances work is as hard to find as Diogenes's corpse.

Thousands of pages are published by the University every year giving facts and figures and charts and tables for every detail of Harvard's money machinery. But without some overall context in which to set these details, the available information is understood only by those who work directly with Harvard's money and know the answers anyway.

A persistent outsider can decipher a small part of Harvard's financial hieroglyphics, but even such a hard-earned glimpse may give a misleading idea of what's really written on the Rosetta stone. This article is offered as a humble effort at adding a little light to the great wealth of darkness that surrounds everything having to do with Harvard's riches.

What is the endowment and why should I care about it?

The endowment is the enormous mass of stocks, bonds and miscellaneous holdings that Harvard currently owns. The endowment's total market value, or amount of money that Harvard could get if it sold all of its investments, currently amounts to over $1.4 billion, making Harvard the wealthiest university in the world. (This amount of course, does not include the value of the campus's real estate, buildings, or other facilities not currently earning a profit.)

Harvard's endowment is so large that the next richest school, Yale, has an endowment over half a billion dollars less. And of the total endowment of all universities in the United States, Harvard's endowment makes up nearly one tenth.

None of this enormous sum is spent. Instead, the money sits in various investments, and continually grows -- last year at a rate of 7 and one half per cent annually.

If none of the endowment is spent, what good is it?

Although none of the endowment is spent, it provides money to the University through what is called "income" from investments. This is not the same sort of income that the layman talks about when he files his income tax forms. Investment financiers define investment "income" as the money earned from interest on bonds and dividends on stocks. But as any amateur stock market speculator knows, stocks do a lot more than simply draw dividends -- they bring their most dramatic earnings through increases in value on the stock market. These earnings, which are less regular because they are dependent on the health of the economy and the luck of the investor, are called "capital gains." As a set policy, Harvard never spends capital gains, but instead allows them to accumulate for reinvestment, making the endowment grow.

The theory behind Harvard's system of investment management is that it is necessary to keep the endowment growing in order to insure that "income" (which comes out to about 4 per cent of the total) continues to grow in pace with inflation.

An analogy that may help clarify Harvard's reasons for its investment policies could be made between the endowment and a fruit-bearing tree. "Income" would correspond to the fruit, while capital gains would correspond to the growth in the size of the tree. Under Harvard's investment policies, only the fruit is allowed to be picked and sold for money to cover current university expenditures. The additional growth of the tree, in terms of new branches and height, should not be chopped off and sold for firewood because if this is done, the amount of fruit will not increase next year in pace with costs.

But this analogy is loaded in favor of the current investment policies that Harvard practices. Although fruit and branches are distinctly different substances, "income" and "capital gains" are really the same thing -- money. The decision to keep capital gains in the endowment and to define usable income as dividends and bond interest is basically a matter of conservative financial habit, not of any accepted pattern of economic rationality.

Even the University Committee on Governance, which was chaired by former dean of the Faculty John T. Dunlop, agrees that the difference between "income" and capital gains is simply one of arbitrary definition. "The distinction makes no economic sense," the committee reported in November 1970. "After the fact, and at any point in time, a dollar of realizable capital gains [that is, capital gains whose value can be turned into spendable dollars through sale of stock] is exactly equivalent to a dollar of 'income.'"

But even though the distinction is not dictated by economic rationality, it is not totally lacking in logic. The arbitrary decision to use capital gains for increasing the endowment is simply a handy device for deciding what part of the total earnings (capital gains and "income") should be kept in the endowment. There is a strong case for reinvesting a certain amount of the total earnings back into the endowment in order to insure that the endowment will increase enough to provide the University with money to pay for increasing costs due to inflation.

Money from the endowment is likely to become more and more important in the next several years. At present, income from the endowment pays for about a quarter of Harvard's operating expenses. Three other sources -- government grants, private donations, and tuition and boarding charges -- pay for the balance. But government aid to education is steadily dropping, private gifts are unreliable, and tuition can only be expected to rise as fast as inflation. With the University facing a higher rate of cost inflation (estimates range from 5 to 7 per cent) than the general public, the endowment is likely to be called upon to carry an increasing share of the burden.