During the War of 1812, Connecticut sold captured British frigates and gave Yale the proceeds, a time of financial comfort that the renowned private university no longer enjoys.

Yale and other American private colleges have been ravaged by inflation.

But Yale's budget problems captured the widest attention, in part because the university was slow to awake to change and in part because some of its scars are from the self-inflicted wounds of an unwise investment policy.

As a result, Yale is in a period of retrenchment that has raised fears the university will sacrifice the quality of its undergraduate education in its effort to stabilize its financial affairs.

"We can no longer try to be excellent at everything," A. Bartlett Giamatti said before being chosen Yale's president in its era of lowered expectations.

Giamatti and the Yale Corp., which governs the university, are determined to maintain excellence in undergraduate education, but a recent faculty committee report warned that low salaries and benefits threaten the quality of the faculty.

"One cannot predict with precision how far this process can go before Yale begins to incur substantial losses of its more productive and highly mobile faculty. But the limit must be approaching if it has not passed," the report said of Yale's financial retrenchment.

Vice President for Finance Jerald Stevens, who was brought to New Haven last year to teach Yale how to live within its means, said that faculty cuts are an essetial part of retrenchment, but denies that they will affect the caliber of a Yale edcuation.

T. Paul Schultz, the economics professor who chaired the faculty committee, agress. "You don't come right out and say you should cut faculty by 10 percent, but other schools did it and I don't see that we really have another way out," he said.

Other private universities -- notably Stanford and Princeton -- found themselves staring at similar economic facts in the late 1960s and began to make cuts then. "It was a lot less painful to act early," remarked one Yale Corp. member.

This fall, Yale made its new financial order more obvious to undergraduates. Students weren't allowed to register unless their term tuitions had been paid in full.

By all indications, despite its budget problems, Yale is a popular undergraduate college. It had more freshman applications this year than ever and the precentage of accepted applications who decided to attend is running high.

The applications are for a smaller undergraduate enrollment. Yale decided to reduce it from 5,311 to 5,000, a sacrifice costing the university tuition income but designed to help maintain excellence in instruction.

Inflation and oil price increase that drove Yale's energy bill from $2 million in 1970 to an estimated $17 million this year have played a major part in Yale's -- and other universities' -- problems.

But it was Yale's investment policies that drew interested attention and some ridicule.

In 1967, McGeorge Bundy, president of the Ford Foundation, declared that university endowments were managed too conservatively and commissioned a report that challenged endowment managers to aim for "total growth" rather than just stocks paying the highest dividends.

"Total growth" is dividend earnings plus the capital gain of the stock. One of the 10 authors of the report was Yale's president then, Kingman Brewster.

"There's a lot of very sage hindsight on all this," a member of the Yale Corp. said, pointing out that it is easier to see now that 1967 was the wrong time to make a more "go-go" investment policy.

At the same time that Yale was getting out of some stocks paying 6 percent dividends in favor of stocks paying 2 percent but having better growth potential, the university began to do what all dowagers used to be told to avoid -- it started spending capital.

The idea was that capital gains would keep swelling the endowment capital so it wouldn't hurt in the long run to slice off a small part each year. The result was the Yale's endowment was $543 million in 1978, scarcely more than it had been in 1966, while the dollar's purchasing power has greatly eroded over that decade.

The key planning tool is "the university equation," or how much can be spent prudently. Yale has frozen spending at about 5.6 percent of the endowment and restricts spending of new gifts to 4.5 percent. "Yale also has gone off spending out of capital," Stevens said.

A university -- or museum, church or dowager -- doesn't want to spend more because even if earnings are 12 percent, a large part of them are going to inflation. Thus, if Yale were to earn 12 percent, and spend 5 percent, the balance left in the endowment would not be sufficient to keep Yale's capital intact with today's inflation.

For all the criticism of Yale's investments, they outperformed the Standard & Poor's index for the 10 years ended last June 30.

And for all the talk of Yale's profligate way, other universities have been spending at rates equally unsustainable.

In the long run, America's private universities may no longer be private. The big story, said one member of the Yale Corp., may be in the ultimate bankruptcy and bailot of all the private universities, except maybe the richest, Harvard.

The Harvard comparison galls Yale. While Yale's past investment decisions are questioned, Harvard's are praised. Yale's endowment, thanks in large part to a $370 million fundraising drive, is up to $580 million, but Harvard's is $1.46 billion.

Yet, Harvard spent from its endowment at almost the exact same 5.6 percent rate last year, although it will be 5.4 percent this year. "The spending rates are not that dissimilar. The endowment performance is not that dissimilar," said Thomas O'Brien, Harvard's financial vice president.

Harvard, like Yale has an old physical plant that needs renovation; it needs more money for scholarships and it needs to raise faculty salaries.

Yale's situation, where faculty salaries have declined by about 10 percent relative to Harvard's over a decade, is particularly acute. But Harvard President Derek C Bok pointed out in a recent letter to alumni that Harvard salaries have declined more than 15 percent in real dollars over 10 years.

Bok's letter was the announcement of a $250 million, five-year-fund-raising campaign to help Harvard keep its preeminent position as the private university least threatened by the future.