Appendix: Interest and Production

APPENDIX Interest and Production INTEREST: The accountants employed by both business and government agree that all the costs of production must be recorded if an accurate accounting is to be rendered. In all private corporations — and in most government corporations — it is agreed that interest is a cost of production. It is so recorded. The United States General Accounting Office says: "It should be noted that the Bonneville Power Administration considers that interest on the investment, among other costs, is an essential element of cost, and calculates interest on the Government's investment in the power program at 2/2 per cent per annum, a rate established by the Federal Power Commission as the approximate cost... to the Treasury of the United States."* The Federal Housing Authority, Hoover Dam, and other government corporations also record interest as an inescapable cost of their production.

In referring to the fact that TVA does not pay its interest costs, the General Accounting Office states: "Unless all the costs to the Government of the power operations are included in the Authority's statement of power operations, the relation between power gross revenues and costs cannot be completely established, and it cannot be conclusively shown that the power operations are selfsupporting."* * Government Corporations Appropriation Bill, 1949; p. 583; recommendations of General Accounting Office on Tennessee Valley Authority, April 6, 1948.

IW § E Ig < o I l& la CO D O50| 00 f-H O^ <-^ co" I I I I I I I I 1 I I I I I I CO CO I CO N CD CO '-H I I•99I I I I I I I I I csj oq CM csj co I I I I I I I I I I I *> .2 Z So I I I I co I I i i i i i i i i i i a %a 2 2 1 8 CM i-s" t-T i-T CNT CM" CM" I I I I I I I I I oi co co" co" •3 £ S3 8 I 9 *2 ^ OH «3 1^1•-5 o m 3 •ee•2 . .2 '. |fe | So<U P-i 0) P-i 1! tf "2« S3 6fi •S ^ S &• •3 o an i it5i 3§ r-H CS] O5 fl i-H i—l i—H i-H INTEREST IS A NECESSARY PRODUCTION COST 97 TVA itself correctly followed this principle when it charged an interest rate of 3% per cent on the money that it loaned to its subsidiary cooperatives. And while TVA — with one minor exception — never has recorded interest against itself, this statement by TVA in 1938 indicates that TVA was aware of the fact that interest is a cost of production: "The present decision [not to record interest] does not preclude a later redetermination of this question nor a setting up for comparative or other purposes of pro forma statements which include interest during construction and other similar items."* The table on page 96 is one such pro forma statement of the interest cost on the total TVA project.

In addition to the interest cost shown by this table, there is another large cost not recorded by TVA. The U.S. Treasury now holds $56& million in TVA bonds. (It was $65 million in 1939.) By "special agreement" TVA pays only one per cent interest on these bonds.t This interest cost to the Treasury in 1947 was about $1,130,000. TVA paid to the Treasury only onehalf that amount. The other half of this interest cost — $565,000 — was borne by the taxpayers. When this yearly subsidy is compounded and totaled for the past nine years, the resulting figure shows that an additional interest cost of at least $7 million should be recorded against TVA. When this $7 million interest cost is added to the $113 million shown by the preceding table, we find that a minimum interest cost of $120 million on the total TVA project has been borne by the taxpayers instead of by TVA customers. Since this subject of interest is such a vital issue among the TVA financial practices, let us consider what interest is. Interest is the payment offered to a person to persuade him not to spend his money — not to buy and consume goods and services — today; it is the promise of more goods and services tomorrow — or a year from * Allocation Report of TVA, June 9, 1938, p. 17.

f TVA Annual Report, 1947, p. A-7.

98 APPENDIX: INTEREST AND PRODUCTION now — for lending money for future production instead of spending it on immediate consumption. It may include an additional premium — profit — in order to persuade the investor to accept the risk that he may not get back even as much as he loans or invests. Payment of interest is the method of inducing the saving and investing that is necessary for the production of goods and services under voluntary (private or free) enterprise. Without this inducement — interest and the chance of a profit — some other method of "persuasion" becomes necessary to get capital. What this method must necessarily be can best be understood by looking at Soviet Russia. In that country, there is little voluntary saving for capital investment. The amount of current production in Russia that is saved to build machines for future production is determined by the government. Since there is no other place to get this necessary "saving," the Russian government takes it from the workers' current production. The workers themselves have no choice whatever in the matter. It is true that the Russian workers are promised great future returns — interest? — in the form of more government-produced clothing, radios, food, housing and electricity. They may or may not get this "interest" that has been promised to them in return for their present sacrifices. But in making this promise, the Soviet government shows its recognition of the fact that — whether in Russia, the United States or anywhere else — the cost of production always includes interest as a reward for saving or sacrificing today in order to increase tomorrow's production.

For instance: "The Soviet government... has certainly acquired a vast capital equipment. . . . For the most part, the capital has been provided by the people through savings, which they either did not know they were making, or which they could not avoid. Funds raised by taxation and goods acquired by governmental requisition are examples of compulsory savings. ... But in connecCAPITAL FORMATION IN RUSSIA; FREE CHOICE 99 tion with this matter it should be noted that this system has no power to alter the process of capital formation in its essentials. The accumulation of capital involves a sacrifice of consumable income by some individual or group in society. Neither socialism nor communism nor fascism can make saving burdenless; they can merely conceal the burden."* In the final analysis, interest in one form or another is a cost of all investment of capital. This is just as true for government projects as for private enterprise. It is also just as true for capital raised by taxation as for capital raised by borrowing. Interest is a cost of all TVA production. This is true because persons were forced to "save" — pay taxes — in order that government could build TVA for future production. If the citizens had been permitted to keep their money, they could have spent and consumed the portion of their current production that was taken to pay for TVA, or they could have invested it at the rate of interest that was being voluntarily paid by persons in the free market who wanted to use the money to produce shoes, railroads, gasoline and similar products.

Thus taxpayers were forced to give up funds they would have preferred to spend on current consumption, and they lost the interest on whatever portion of their savings that was taxed away to pay for TVA. And thus the customers of TVA continue to receive the benefits of these sacrifices and of this interest which TVA does not acknowledge as a cost of its production. There is no choice about interest being a cost of TVA production. The only choice is whether we wish to have compulsory, government-decreed savings and production or voluntary savings and production. In the case of either voluntary production or compulsory production, the full cost —' including the costs necessary for original construction, plant expansion, experimentation, misFairchild, Furness and Buck, Elementary Economics (Macmillan, 1948), Vol. II, p. 670 100 APPENDIX: INTEREST AND PRODUCTION takes and failures — must be paid. In the case of voluntary production, the costs for construction, expansion, mistakes, experiments and failures are mostly paid by the persons who have voluntarily invested or loaned their savings in the hope of receiving dividends — interest and profit. But in the case of compulsory, government production, these costs are charged — in part or in full — to persons who do not receive the benefits; to persons who would not voluntarily invest in the project.

The costs of the capital used by TVA, including the interest costs, are present whether recorded or not. But if these costs are not recorded, there is no way for the voters, the taxpayers, and the consumers to know whether or not TVA is an economical use of capital. This confusion seems to be an inevitable result of government attempts to combine functions that cannot be provided by a free market, with services that can be supplied by a free market. When both are financed from the same source — the general tax funds — the confusion becomes complete. The taxpayer has no positive way of knowing whether his taxes are used to provide "cheap" electricity for persons who live in Tennessee, or whether his taxes are used to support the judicial system and the police force that equally protect all citizens. As government takes over more and more services that the citizens once performed for themselves, the distinction between who pays, and who receives the benefits, tends to disappear altogether.