FOUNDATIONS, ENDOWED. Organized in America either as charitable trusts or nonprofit corporations, philanthropic foundations are nongovernmental, nonprofit organizations, having funds and a program managed by trustees, established to aid social, educational, charitable, religious, or other activities serving the common welfare. In 2000 there were around 50,000 foundations in America, with combined assets totaling almost $450 billion; over fifty foundations have endowments over $1 billion, with the largest, Lilly Endowment and the Gates Foundation, over $15 billion. Grant-making foundations distributed around $27 billion to nonprofit organizations in 2000.
While the modern philanthropic foundation is an American invention, dating from the early twentieth century, special-purpose endowments have existed in most civilizations for centuries. Queen Elizabeth's "Statute of Charitable Uses" (1601) provided for trustee supervision of charitable bequests and listed legitimate objects of charity, including poor relief, education, medical treatment, and the care of widows and orphans. Typical of some of the earliest trusts in America was the William Carter fund (1739) for support of an alms house in Philadelphia. In his will of 1791, Benjamin Franklin established a trust for apprentices in Boston and Philadelphia, to borrow $300 at 5 percent interest. Like Franklin's, however, most early charitable endowments were local in scope and narrow of purpose.
The first modern foundation was established by the financier George Peabody in 1867, to "aid the stricken South," although it exhausted its capital by 1914. The real beginning of the modern foundation can be traced to the philanthropic work of two great industrialists of the nineteenth century, Andrew Carnegie and John D. Rockefeller. Seeking to move beyond "retail" philanthropy, Carnegie and Rockefeller experimented with several forms before applying the business corporation model to the creation of "general purpose" foundations. These were governed by self-perpetuating boards, with professional staffs and permanent endowments, and a wide mandate, such as Rockefeller's, "to promote the well-being of mankind throughout the world."
The early foundations, such as the Russell Sage Foundation (1907), the Carnegie Corporation (1911), and the Rockefeller Foundation (1913), each sought to develop scientific principles for philanthropic giving, avoiding charitable relief and instead focusing upon underlying causes. Grants were the venture capital of philanthropy, to experiment with programs before passing successful models along to governmental agencies, such as the successful public health campaign against hookworm of the Rockefeller Sanitary Commission.
These major foundations were designed to be perpetual, with investment strategies to provide significant income for grants but also to maintain capital. For example, the Rockefeller Foundation was capitalized in 1913 with around $182 million, and after giving away almost $2 billion, its endowment in 2000 approached $4 billion. Critics of perpetual endowments have come from both sides of the political spectrum, and at least one critic, the Sears executive Julius Rosenwald, established a fund himself. Rosenwald, who helped build over 5,300 schools and teachers' homes in the South, insisted that "all of the principle of this fund must be expended within twenty-five years" of his death. Few donors or trustees have followed Rosenwald's advice, however.
Foundations have their own life cycles. Control of assets and grant making is initially under the founder's control, but after the donor's death, control passes to family and trusted business associates. Within a generation the board often becomes composed of public service trustees, who soon defer to the expertise of a bureaucratized and professional staff. The number of foundations increased dramatically over the course of the twentieth century. With less than 20 established by 1910, by the end of the 1920s there were almost 300. By 1950, there were around 2,000 endowed foundations, and between 1980 and 2000 the number of foundations doubled, to around 50,000.
Foundations came under serious scrutiny several times in the twentieth century, especially due to their tax-exempt status. The first inquiry was Senator Frank Walsh's Commission on Industrial Relations in 1915, which criticized foundations as dominated by reactionary business interests. By the late 1940s, some businesses were using corporate foundations as tax shelters, leading to the Revenue Act of 1950, which prohibited self-dealing, taxed profits unrelated to tax-exempt status, and prohibited unreasonable accumulations of assets. This soon led to the largest single grant, the Ford Foundation's of $500 million for private universities in 1955.
Two major investigations took place during the Mc-Carthy era. In 1952 the Cox Committee investigated whether foundations were undermining "existing capitalistic structure." While endorsing foundations, the Cox Committee called for increased public accounting of activities. The following year the Reece Committee attacked foundations as subversive. Starting in 1962, the Texas congressman Wright Patman began eleven years of investigations into foundation activity, mostly from a populist direction.
The Patman investigations, along with increased economic difficulties, led to the Tax Reform Act of 1969. A historic turning point, for the first time foundations were defined in law. The IRS tax code section for tax-exempt entities, 501(c)3, created two major divisions: "public charities," which include hospitals, museums, private schools, and even public television stations; and "private foundations." Private foundations are based on a single source of funding and use income from investments to make grants to other nonprofit organizations. Restrictions were placed on political activity and excess business holdings, and foundations were prohibited from self-dealing. They were required to pay an excise tax on income, and also had a minimum payout, eventually set at 5 percent. Corporate or company-sponsored foundations also fell under this category. While historically similar to private foundations, community foundations, like the Cleveland Foundation (1914), pool the resources of many donors and are treated more liberally, as "public charities."
Since the 1969 Tax Act, while a small undercurrent of criticism has continued from left and right, there have been no major investigations of foundation activity, suggesting wide public acceptance. Much of this is due to increased public disclosure and published studies. The Foundation Center was established in 1956 to provide information about philanthropy, and the Ford Foundation began funding scholarship on the field's public activity. Two private commissions in the 1970s, most importantly the Filer Commission on Private Philanthropy and Public Needs (1973–1977), increased public awareness of the newly named "third sector." By the end of the century over seventy universities had centers or courses for the study of philanthropic foundations, and there were several lobbying organizations.
The general-purpose philanthropic foundation is a distinctive American invention, and, over the course of a century, it has developed into a necessary countervailing force in an era of big government, contributing to an American style of public/private partnerships that have helped provide for democratic pluralism and public welfare both in America and abroad.
Dowie, Mark. American Foundations: An Investigative History. Cambridge, Mass.: MIT Press, 2001.
"Foundation Yearbook: Facts and Figures on Private and Community Foundations." Part of the Foundation Center's Foundations Today series, available at http://www.fdcenter.org.
Hammack, David, ed. Making the Nonprofit Sector in the United States. Bloomington: Indiana University Press, 1998.
Kiger, Joseph C. Philanthropic Foundations in the Twentieth Century. Westport, Conn: Greenwood Press, 2000. Kiger was the research director of the Cox Committee.
Lagemann, Ellen Condliffe. Philanthropic Foundations: New Scholarship, New Possibilities. Bloomington: Indiana University Press, 1999.
O'Connell, Brian, ed. America's Voluntary Spirit. New York: Foundation Center, 1983.