Chapter 5: Interest

CHAPTER 5 Interest With one minor exception, TVA accounting ignores the interest cost on the money invested in this project. As a result of this policy, the cost of about $120 million of accumulated interest from 1933 to 1947 on the total TVA project was borne by the taxpayers. The technicalities of this question of interest are discussed at length in the Appendix, page 95. But the following quotation from a recent report to Congress by the United States General Accounting Office recognizes the fact that interest is a cost of TVA production. After a thorough investigation of TVA financial practices, the General Accounting Office reported: "The fact that no interest is currently being charged or paid results in failure to reflect the total cost to government." (That is, to the taxpayers.) Then the General Accounting Office recommended: "Therefore, the interest rate on the amount of the investment [in the power program] . . .

should be calculated by the Treasury Department so as to reimburse ... the Treasury for its costs."31 The fact that the TVA electricity rates do not include interest and other inescapable costs of doing business, does not mean that these costs are thereby avoided. It means only that these costs are borne by the taxpayers instead of by the TVA customers. Probably everyone who ever heard of TVA is familiar with the original claim that TVA was to be a "yardstick" to measure the 34 INTEREST rates charged by private power companies. For this purpose, it was announced that TVA was to operate financially as much like a private power company as possible. But on this matter of interest cost, the TVA "yardstick" seems less than the customary three feet long. This estimate of an interest cost of $120 million on the total TVA project is based on low government interest rates. Thus, even if TVA paid interest, the rate would still not be an accurate yardstick because government forces down its own interest rates below the true value of capital in production. It does this by inflating the national currency and credit, and by taxation. First, by its monopoly of money and control of banking, government can make its own bonds convertible into currency. Thus it can and does print the money or create the bank credit used by purchasers to buy government bonds. Second, government can and does meet the losses on its own undertakings by taxing the profits of successful private enterprises. Thus it eliminates the risk factor, not from enterprise, but from government interest rates. It does this not by superior efficiency in production, but by shifting its losses to private industry.

Therefore, if a yardstick to measure operating efficiency is wanted, either one of two procedures could be used. First, one might use the costs of privately produced electricity if private power companies had the privileged interest rates of government. Second, one might figure TVA costs at free market rates. Obviously the second method is much simpler and more consistent with the facts of a free economy. Applying it, TVA total interest costs from 1933 to 1947 at free market rates would be, not $120 million, but almost $200 million. In addition to this $120 to $200 million interest cost, another large capital and interest cost was involved in the transfer of the government-owned Muscle Shoals project to TVA. When Wilson TVA USES SHORT YARDSTICK; MUSCLE SHOALS 35 Dam (the hydroelectric part of Muscle Shoals) was transferred to TVA in 1933, the government had directly invested $47 million in it.32 When interest at low government rates — and other unrecorded costs actually paid by the taxpayers in one form or another — are added to this figure, the total cost of Wilson Dam to the taxpayers becomes $86.3 million.33 But TVA took it over for $31.3 million.34 How much of the total cost of Wilson Dam should have been recorded against TVA? The total cost less depreciation? The direct investment of $47 million less depreciation? None of it? Since Wilson Dam belonged to the government both before and after the transfer and write-down (purely a bookkeeping transaction) there is no accurate method to determine its value. Like any other productive enterprise, this value could be determined by submitting it to the impartial test of a free market. But the government decided against this procedure. TVA was given the privilege of setting its own value on Wilson Dam. It decided that this particular government-built and operated hydroelectric project that cost the taxpayers a total of $86.3 million was in fact worth only $31.3 million.

TVA may have been correct in its estimate. But that estimate would seem to cast considerable doubt on the argument that government — which includes TVA —can build hydroelectric dams cheaper and more efficiently than private enterprise can build them. It is true that government has sold — and is still selling — many properties to individuals and to private companies at far less than the cost of the properties. But this does not mean that the cost is thereby avoided. It means only that the difference between the cost and the value of this government production is paid by the taxpayers. This procedure cannot be advanced as proof that government is a superior productive agent.