world of crime. He would spend $10,000 of endowment per student, 35 per cent of which would be used to insure the student for $6,000. When the student dies, the college would be reimbursed. But Jones does not realize that this means an erosion of endowment. The college would lose the returns on the $6,000 for forty years or so.
One aspect of endowments should not go unnoticed. When a college borrows to build a dormitory (say), in a sense this means a reduction of capital funds. Yet a strong case can be made for recourse to borrowing when the funds can be had at lower rates than the income yield on endowment funds. Why not limit demands for funds in large campaigns to those categories where loan financing is not practical? Where a college houses most students, for example, and does not charge for capital, then such a college, by borrowing for dormitories and allocating the financing charges among all students in dormitories, can by an increase of rents of about $50 per year avoid appeals for millions in fund drives.11
In conclusion let me say that as a result of certain past abuses in the use of endowment funds, as a result of inflation, rising productivity, and increase of enrollment, and because endowment funds are often not effectively adapted to current educational values--for all these reasons endowment funds have become less important. The growth of other sources of revenue, including governmental grants and student fees, also tends to make endowment funds less important. In order to alert the faculty, Adam Smith undoubtedly was excessively hostile to endowment funds; but it is nevertheless true that universities and colleges should be sensitive to the needs of the community to some extent and that if they are excessively endowed, they are less likely to achieve even this minimum degree of sensitivity.
Nevertheless we should not minimize the importance of endowments. They assure some continuity of policies and a minimum of freedom from outside pressures. Even public IHL, with very little endowment income, are finding in rising endowment a degree of freedom which is especially welcome to institutions too much under the control of legislators and state budget officers.
But the major reason for shift from endowment to current gifts is that gifts are the most effective way to get necessary revenue when needed.12 Another point on behalf of current gifts is that a dollar spent today is likely to yield more plant, equipment, and services than a dollar spent tomorrow.