Looking Backward, Looking Forward

Booms and Busts

From the depths of our economic trough it is hard to look ahead, clear-eyed, and to see where U.S. foundations are headed. But consider, for a moment, where we have been. We have experienced an era in which: :

• New scientific and technological advances captured the popular imagination.
• These innovations promised a huge jump in economic productivity.
• There was talk about a new economy replacing an old economy.
• Many business corporations were consolidated and reorganized.
• Markets — financial, consumer, and business-to-business markets — were reshaped.
• New technologies shrank global distances.
• New fortunes were created in numbers and on a scale never seen before.
• New approaches to philanthropy were being widely discussed.
• Disparities of wealth and income grew larger and larger.

And the exuberance of the boom years was followed by a bust of historic dimensions. Three years on, it has dashed expectations and shows few signs of ending.

This description is familiar to all of us who have lived through the expansive years of the late twentieth century and are now wondering when or if the good times will ever return. In broad outline the same description would be familiar to the generation that enjoyed the booms and despaired at the busts in post-Civil War America. The similarities are profound.

While it is always tempting to look for historical analogies — and much too easy to oversimplify and to exaggerate their relevance — the comparisons between these two turns of the centuries are useful for those who want to understand the history, and perhaps even to speculate about the future, of philanthropy in the United States. Both were eras in which philanthropy was much talked about. (Andrew Carnegie's essay “Wealth” first appeared in 1889 on the eve of the economic depression of the 1890s, a crisis far more devastating than our current market crash and recession have so far been.) And as it was a century ago, a sense that something is changing in philanthropy permeates our own time.

Grappling with Change

With more than a century's perspective we now understand that the period from about 1890 to 1920 was a time in which U.S. philanthropy was fundamentally transformed:

• The first great general purpose foundations appeared.
• Federated fundraising campaigns and community foundations were born.
• The idea of “scientific philanthropy” and the search for the root causes of social and economic problems motivated the work of foundation donors and professional staff.
• A growing spirit of professionalism infused the fields of medicine, law, and business as well as academic and philanthropic life.
• Foundations looked beyond their immediate locales to address national and even international concerns as the United States began to assert itself as a global power.

The new economy and the new wealth generated in the post-Civil War economic expansion had sparked nothing less than a philanthropic revolution. Do insights into those years of change give us any hints about where we might be headed?

We are now several years into an economic downturn. No longer do we hear the once ebullient talk about a “New Economy.” Indeed, the boisterous proponents of the new economy of the 1990s have been severely chastened. Countless business ventures have failed. Earnings and profits, though spurious balance sheets might have found a way to show them, never materialized. Jobs have disappeared. Trillions of dollars in stock-market wealth have evaporated. Puzzles about the rates of growth in economic productivity stimulated by the new digital and Internet technologies are still unsolved. And those who echoed the praise of the new economy with their own expectations of a “New Philanthropy” or a “New Golden Age of Giving,” seem chastened, too. It is a gloomy moment for those of us working in foundations, the nonprofit sector more generally, and cultural organizations in particular.

But it is also a useful moment to step back and to ask how we might appraise the impact of our newest new economy — the boom as well as the bust — on philanthropy. By looking back at the forces that have changed philanthropy in the past, we can pose questions that might help us to distinguish the superficial changes from the more enduring, that is, to penetrate some of the rhetoric of the new philanthropy and to assess the substance.

But a cautionary note: History is not a predictive tool. Historians understand how contingency, chance, and the unexpected can intervene. Historians are temperamentally reluctant to look ahead. But history can be an analytic tool that serves to remind us what factors have driven change in the past.

At the end of the nineteenth and the beginning of the twentieth century several forces were at work:

• The growing size and scale of private fortunes and, ultimately, of foundation assets generated new organizational structures and new philanthropic ambitions.
• New business practices and values, especially concerns with scientific management and efficiency, were embraced by the philanthropic world.
• Public scrutiny and ultimately new public policies altered the environment in which foundations operated.
• Contingent events — World War I, the boom of the 1920s, Depression, and New Deal — altered the role that foundations felt they could play in the United States and the world.

These factors shaped the course of U.S. foundations in the early twentieth century and they point us toward some of the questions that we might want to ask as we move deeper into the twenty-first century.

How will size and scale matter?

Aggregate foundation assets, though smaller than at the market peak, have grown impressively over the past two decades. But substantial as they are, they are also only relative — relative to the overall size of the economy, to government expenditures in areas of philanthropic concern, and to the sheer magnitude of the problems we face. Assets moving into the nonprofit sector will presumably continue to increase significantly even under the most cautious assumptions about economic growth. We should not be misled by the absolute scale of philanthropic assets. Instead, we should look at their size relative to needs, to the scale of the problems, and to the resources governments choose to commit to these areas.

This said, however, it is not the scale of the wealth in the sector that will be likely to matter most in the coming years but rather how and where these assets are held. What does it mean that there are now many more large foundations than only a decade ago, some of whose assets are measured in ten figures? At the peak of the financial boom there were approximately fifty foundations with assets in excess of $1 billion; there are still a hundred or so with assets in excess of $500 million. At the other end of the scale, what does it mean when the numbers of foundations, tens of thousands of them small and un-staffed, proliferate so rapidly? And what are the consequences of the rapid growth in the number of donor-advised funds held within commercial institutions? As we think about the future, we should look not to the aggregate wealth of foundations but to the proliferating numbers of foundations, to the changing organizational structures for holding philanthropic wealth, and to our mechanisms for deciding how that wealth is distributed to nonprofit organizations.

While we should applaud the commitment that new donors have made to continuing our traditions of philanthropy, we must also ask whether the scale of their philanthropic wealth has had a transforming effect on philanthropic ambitions or has yielded new approaches to our social and economic problems. With few exceptions (most notably Gates), it appears that the new scale has brought with it, not new ambition but renewed caution, a desire for certain results and measurable outcomes, a search for structures that will assure tighter control over beneficiaries rather than a free-wheeling search for new ideas.

How will new technologies and new business practices matter?

Historians of technology and the economy have analyzed other eras of technological innovation and diffusion. Some have described the initial period as one of “installation” when a new technology is invented and engineers, entrepreneurs, and venture capitalists search frantically for the technology's best uses and their own profitable returns. Capital flows and then floods into new ventures. A crash inevitably comes. But then it is followed by a second phase, which some historians speak of as “deployment,” in which the technology matures, becomes more reliable, new applications are found, and these then transform businesses and market relationships within the “old” economy. Thus, historians have seen Gilded Age excess giving way to Golden Age prosperity. Looking ahead, historians can hope to see the pattern repeated, even if they cannot confidently predict when the next phase will occur.

In looking toward the future of foundations, we ought to be asking how the deployment of more reliable computer and communication technologies can alter our own philanthropic structures and practices. How can philanthropic transactions — which most of us will readily acknowledge to be too slow, cumbersome, inefficient, and costly to grantees — be rendered more efficient? How can relationships among foundations — sharing expertise, coordinating projects, evaluating results — be changed? How will global relationships among emerging civil society organizations be altered? What are the implications of new technologies for our mechanisms of public accountability and our governance structures? We can already glimpse some of these changes. They include, among other things: Guidestar with its ready availability of foundation tax returns, the Web sites of some 1,200 foundations, and the Foundation Center with its online resources. But we are still decades away from comprehending the ways in which foundations and the nonprofit sector are going to be changed by new technologies.

How will public policy alter the environment?

Populist hostility surrounded the large general purpose foundations from the moment of their first appearance. In the 1910s the Walsh Commission in its investigations of labor relations and industrial power called many of the nation's corporate and philanthropic leaders to testify. Trusts, whether corporate or philanthropic, were viewed suspiciously and questions about how to control them have persisted. While it took over half a century for the now familiar regulatory regime to emerge in the Tax Reform Act of 1969, foundation practices have faced public scrutiny with some regularity. They will continue to do so. Policy changes and their timing are impossible to predict. Debate can flare up in the wake of real scandal, manufactured charges of abuse, or simple misunderstanding about how foundations work. And the consequences of regulatory and legal changes are usually unforeseen or unintended.

However, one decisive change looms large: the impact of changes in the estate tax. Whether estate taxes are completely and permanently eliminated or the exemption greatly increased, no one can predict the impact on the transfer of wealth into charitable institutions. We do know that tax policy can create or eliminate incentives for donors even if we do not know precisely how to calculate the effects of those incentives. And we know that estates with a tax liability give two to three times more than those with no liability. Economists who have created models to estimate the decline in bequests if and when the estate tax is eliminated predict drops ranging from a low of 13 percent to a high of 41 percent in the value of bequests.

We also know that regulatory changes can affect foundations in many ways, from the structure of staff to the behavior of boards, from the administration of grants to the willingness to communicate with the public. Public and, most significantly, congressional scrutiny of foundations is growing, in part because foundations have become so much more numerous, in part because their resources have grown so rapidly, in part because so many nonprofit organizations are now and for the foreseeable future will be in straitened circumstances. The potential for abuse grows, too. It is too early to say where public policy will lead but not too early to ask where it ought to go. We should also remember that some of the foundation executives who resisted the regulatory changes of the 1969 Tax Reform Act (and it was far from perfect) came to feel that foundations were better served, in the end, by more public scrutiny than less.

Looking Forward

These questions — about scale and structure, the deployment of new technologies, the impact of public policy changes — are the ones we ought to be discussing as we look toward the future of foundations. But they are only a beginning and they are perhaps too strictly organizational, too constrained and internally focused. The greatest moments of change within foundations have come when trustees and staff tried to understand and to situate themselves within the large historical forces at work in their own day.

At the beginning of the twentieth century some donors and their advisors were asking about social divisions, class conflict, and the inequality of wealth in the United States. While their answers were inevitably inhibited by their own constricted world view, they pondered how their foundations might confront those challenges, what new knowledge they needed, what new institutions they would have to build. In the 1930s foundation trustees and staff confronted their shrinking financial resources and, watching New Deal programs emerge, asked what their relationship ought to be to government. In mid-century, some of the large foundations were quick to ask how they might begin to respond to the issues raised by the demise of totalitarian regimes in western Europe and the demands of post-war reconstruction, the end of colonialism, and the challenges of global development.

Their questions were grand and forward-looking, indeed far larger and more outward-looking than the questions most foundations were asking as the twentieth century came to an end. What big questions should we now be posing? How ought we to be addressing wealth distribution here and abroad, the health of our democratic processes, the construction of institutions of global governance, the religious and civilizational ruptures that threaten the world? When historians look back on us from the vantage point of the early twenty-second century, they will appraise our work not by its efficiency and effectiveness but by our boldness in confronting the major, epoch-defining challenges of our day.

James Allen Smith is senior adviser to the president, The J. Paul Getty Trust.