Donors Big and Small Propelled Philanthropy in the 20th Century

He told wealthy people that they would be disgraced if they died without having donated their surplus money to social causes. Just as important, he said, the wealthy should carefully choose the causes they supported, demonstrating the financial elite’s “superior wisdom, experience, and ability.”

To channel his resources to good works, Mr. Carnegie set up one of the nation’s first grant-making philanthropies, as did other wealthy benefactors, such as the oil tycoon John D. Rockefeller and Margaret Olivia Slocum Sage, a banking heiress.

Over the 20th century, the growth of those foundations, and tens of thousands of other philanthropies now holding several hundred billion dollars in assets, has been rivaled by yet another charitable force, one that Mr. Carnegie and other moneyed aristocrats of his era could hardly have foreseen: the gradually expanding influence of individual American donors of modest means. Grassroots contributors, many of them spurred by on-the-job fund-raising campaigns, have poured tens of billions of dollars into causes as diverse as the arts, social activism, disaster relief, and education.

Indeed, from the early stirrings of the community-chest movement before World War I, to the workplace-giving campaigns in the 1950s, to Internet giving, planned giving, and donor-advised funds in the 1990s, Mr. Carnegie’s gospel of wealth -- intended originally for the superaffluent -- has become scripture for millions of everyday donors.

“Philanthropy is no longer just for the very rich,” says Robert H. Bremner, professor emeritus of history at Ohio State University. “Philanthropy is everybody’s business now.”

The modern business of philanthropy did not begin to take shape until the post-Civil War years. Until then, charity was a fragmented endeavor -- driven largely by religion and characterized by alms giving and volunteerism aimed primarily at relieving the immediate distress of the urban poor.

But in the 1870s and 1880s, during a period of massive efforts by private charitable groups to improve the social conditions of the poor, philanthropy began to change. Some charities started taking a more systematic approach to their work, adopting so-called scientific-management methods that were gaining currency in the business world.

By the time the first big foundations were forming -- the Russell Sage Foundation in 1907, the Carnegie Corporation of New York in 1911, and the Rockefeller Foundation in 1913 -- the scientific approach to philanthropy was firmly grounded and the modern age of giving had begun.

The Russell Sage Foundation, as one example, helped to pioneer the emerging fields of social science and social work to try to improve the lives of millions of people dwelling in tightly packed tenement houses.

“The foundation would look to individual towns for ways of measuring problems and thinking about solutions,” says James Allen Smith, a historian and former foundation executive in New York. “They’d measure window space in tenements and look at how much sunlight comes through the windows of schools. They would count everything that could be counted.”

Meanwhile, an increasingly educated, urbanized America was beginning to think about new and more-effective ways to give -- especially about ways to join forces in giving. The change set the stage for the rapid growth in fund raising by United Ways, Jewish federations, and many other groups.

By the early years of the century, a spirit of cooperation and mutual aid had swept much of America. It was driven by a host of economic and cultural factors, including a desire in some circles to change long-entrenched social patterns, the influence of science in dealing with social problems, and the desire of young professional people to form new business alliances during a period of rapid urban growth.

By 1920, groups as diverse as the Boy Scouts of America, the National Association for the Advancement of Colored People, and Lions International had been formed.

American generosity and volunteerism also was spurred by World War I. In less than two years, Americans gave more than $400-million in gifts and membership dues to the Red Cross in connection with the war -- a clear sign of the growing power of grassroots fund raising and the democratization of giving in the United States.

Even before the end of World War I, one of the most far-reaching trends in modern philanthropy -- the community-foundation movement -- was unfolding. It combined the century’s early patterns of benevolence -- scientific philanthropy, the rise of grant-making foundations, and collective giving -- in ways that helped change the profile of many mid-size and large cities.

In 1914, Frederick H. Goff, president of the Cleveland Trust Company, founded the Cleveland Foundation, a new kind of fund whose money would be raised from local donors, managed by local bankers, administered by prominent local residents, and spent solely on local needs.

As Mr. Goff envisioned it, the Cleveland Foundation would provide a way for bankers, elected officials, and other civic leaders to meet away from the pressures of immediate political debate, then focus their grant making on a carefully tailored agenda.

Mr. Goff said he wanted the foundation to foster “the mental, moral, and physical improvement” of Cleveland residents regardless of their race or religion.

The community-foundation movement was in part an alternative to the big, national foundations in that it provided a way for people of modest wealth to combine their money for local philanthropic programs.

Community foundations grew rapidly, with local leaders in Chicago, Detroit, Minneapolis, and other cities forming similar funds in 1915. By 1930, 21 cities in the Midwest, Northeast, South, and West had community foundations with assets of more than $100,000.

Since then, the idea has mushroomed. Today, about 600 community foundations exist, with assets totaling more than $25-billion.

About the time that community foundations were taking off, an even more momentous event occurred -- albeit one whose impact would take several decades to unfold in full force. In 1913, Congress imposed a personal income tax on Americans, and in 1917 it allowed people to take an income-tax deduction for their gifts to charity.

At first, the influence of the tax deduction was small because the income tax affected mainly the wealthy. But during World War II, the impact of the tax grew considerably as income-tax rates rose and the pay of average Americans increased sharply because of the booming wartime economy.

Suddenly, millions of Americans were paying income tax, and they had a motivation to shelter some of their wealth from the Internal Revenue Service by making donations to charity. By 1945, the last year of World War II, charitable contributions reported in income-tax returns were five times as large as they were in 1939.

Giving continued to expand in the postwar era. In 1955, giving from individuals, foundations, and corporations totaled $7.7-billion, according to the American Association of Fund-Raising Counsel Trust for Philanthropy, an organization that conducts research on philanthropy. By 1978 that total had grown more than fivefold, to $39-billion, before adjusting for inflation. In 1998, the last year for which data are available, total giving rose to $175-billion.

Along with the growth in donations came a huge swell in the number of non-profit organizations. In 1953, the Internal Revenue Service estimated that about 50,000 organizations had received charity status. By 1978, that number had risen nearly sixfold. Today, charities number more than 730,000, according to the latest I.R.S. count.

Helping to propel the growth of charities at mid-century was a huge expansion in the federal budget and in the disbursement of government grants and contracts to non-profit groups that performed social services.

One prime example: the expansion of 1960s-era antipoverty and civil-rights efforts, such as the Johnson Administration’s Great Society program. Washington formed partnerships with thousands of newly created non-profit groups, funneling federal dollars through them to pay for job training and other social programs. “The Great Society programs were an introduction of oxygen into a non-profit world that already was on fire,” says Stanley N. Katz, a philanthropy scholar and director of Princeton University’s Center for Arts and Cultural Policy Studies.

In fact, the fire in the non-profit world was raging on a number of fronts. One was fund raising.

Giving was fueled in the 1950s and 1960s by such factors as economic growth and the expansion of the American middle class, pent-up demand for capital projects at colleges and other institutions, and the increasing competitiveness of health charities like the American Heart Association and National Kidney Disease Foundation.

At mid-century, many charities began to hire full-time fund raisers, whose work benefited from the expanding economy and the burgeoning earning power of American workers. One sign of fund raising’s growing power and prominence came in 1960, when the National Society of Fund Raisers, the forerunner of the National Society of Fund Raising Executives, was founded.

The boom in fund raising led to abuses, which in turn invited calls for stricter antifraud laws. In the mid-1950s, New York broke new ground by requiring fund-raising groups and professional fund raisers to register with the state and report on their activities. By 1964, two dozen other states had enacted similar laws.

As private giving grew, so, too, did corporate giving. Court and legislative decisions in the 1950s and 1960s granted American companies wider leeway to support charitable causes, and a boom in postwar corporate public-relations efforts also helped corporate philanthropy to grow.

Corporate contributions reported on tax returns rose from $239-million in 1948 to $512-million in 1961. In 1998, giving by corporations totaled about $9-billion, according to Giving USA, a statistical almanac published by the American Association of Fund-Raising Counsel.

As fund-raising innovations, economic expansion, and government programs propelled the growth of charities in the decades after World War II, another kind of philanthropy also was expanding rapidly. In the 1940s and ‘50s, thousands of private foundations were established by wealthy individuals, ostensibly to contribute money to charitable causes. High income-tax rates and estate taxes helped to spur the growth of the private funds. While some foundations rose to distinction, many were little more than abusive tax shelters.

“Some people made a tremendous amount of money” from the war, sometimes in “ugly” ways, Mr. Katz says. “They were very well advised by accountants and lawyers on what they could do to manipulate the system.”

In 1950, President Harry S. Truman told Congress that the tax exemption given to private foundations was being used “as a cloak for speculative business ventures.”

That year, Congress passed laws aimed at discouraging people from using foundations for improper private gain. But the new restrictions did little to slow the growth -- or the abuse -- of private foundations.

In the early 1960s, foundations were growing at a rate of 1,200 per year, and financial magazines routinely touted their allure as tax-shelter tools.

Among some populists in Congress, private foundations symbolized the worst kind of arrogance and greed. In 1961, U.S. Rep. Wright Patman, a Democrat from Texas, began a series of aggressive investigations into the activities of the funds. Helping to spur his actions were a number of concerns about foundations and the non-profit world generally: that too much financial and political power was concentrated in large foundations; that some wealthy Americans were using family foundations to abuse the tax system; and that business operations of some non-profit groups were competing unfairly with companies in the for-profit arena.

The Treasury Department subsequently concluded that most private foundations did not abuse the tax system and that they fulfilled an important social function. But the department nonetheless pointed to problems in the private-foundation world. Among the issues that Treasury officials cited: instances of donors and their relatives and associates using foundations for improper private gain, inappropriate business holdings by foundations, and the hoarding of foundation wealth instead of its distribution for charitable purposes.

Congressional hearings in 1969 put foundations on the hot seat. The late Sen. Albert Gore, Sr., a strident critic of foundations, proposed a measure that would prohibit any foundation from existing more than 25 years. Some critics also wanted to force foundations to shed their large business holdings, arguing that such assets were of little or no value to charitable organizations.

What’s more, some in Congress worried about the political power of big funds like the Ford Foundation, which in the late 1960s was run by McGeorge Bundy, a policy adviser in the Kennedy and Johnson Administrations.

“There was a fair degree of trauma” among foundation executives “because nobody knew where the chips would fall,” says Eleanor L. Brilliant, a Rutgers University professor. “Everybody was being looked at, and there was a lot of fear” -- not just among the shakiest small private foundations, but among big, established grant makers as well, she says.

Ultimately, Congress passed sweeping changes in non-profit tax laws, focusing largely on private foundations. Among other things, the Tax Reform Act of 1969 imposed strict rules to prevent insiders -- for example, donors and their relatives or associates -- from using foundations for private gain and required foundations to distribute a minimum percentage of their assets each year for charitable purposes. The act also required foundations to pay an annual excise tax on investment income, curb their lobbying activities, diversify their stock holdings, and exercise prudent standards when investing assets.

What’s more, the act reshaped the tax laws in ways that favored charities over foundations. For example, it allowed more-generous tax breaks for donations to charities, and it sharply reduced the tax benefit for gifts of appreciated property, such as stock, to private foundations. It also imposed stricter disclosure rules on private foundations than on charities.

Ultimately, says Mr. Katz of Princeton, the Tax Reform Act of 1969 “worked.”

“No one believes now that there is systematic abuse, so to that extent, it was very successful legislation,” he says.

In the end, the act was not as draconian as many foundation officials had feared. In fact, says Peter Dobkin Hall, a scholar at Yale University, it turned out to be “an ill wind that blew a lot of good.”

Much of that good came in the form of a non-governmental commission on philanthropy that was created by John D. Rockefeller III, who had been instrumental in trying to fend off Congressional attack against the non-profit world.

The Commission on Private Philanthropy and Public Needs, which was chaired by John Filer, a respected insurance-company executive, produced a report that included a massive body of research that, for the first time, documented the scope and impact of the work done by foundations and charities and their interplay with business and government.

The so-called Filer Commission’s work also helped to forge closer ties between grant makers and grant recipients, two groups that often had been suspicious of each other’s motives and methods.

The result, many observers say, was that charities, foundations, and other segments of the non-profit world began to think of themselves for the first time as part of a single philanthropic entity, one that was extremely important to American society. “The major legacy of the Filer Commission,” says Ms. Brilliant, of Rutgers,"was that it gave an identity to the non-profit world that it did not have before.”

Out of the Filer era came a number of new organizations, including Independent Sector, a Washington advocacy group whose charter members encompassed diverse elements of the entire non-profit world. Another outgrowth of the Filer era was the rise of new academic centers that study philanthropy. The first was the Yale University Program on Nonprofit Organizations.

The Filer Commission also opened the door to new voices in the philanthropic arena, most notably a group that represented disenfranchised people who depended on charities and foundations for help. From that so-called Donee Group sprang the National Committee for Responsive Philanthropy, which has played a significant role in pushing foundations to increase support for grassroots causes related to race, gender, and ethnicity and has encouraged greater information disclosure among foundations. It has also pushed government and corporate fund-raising drives to allow non-United Way organizations to solicit funds from employees.

In the two decades since the Filer Commission, philanthropy has evolved in ways that have been every bit as important as those earlier in the century. The nation’s economic boom has spurred record amounts of private giving and the formation of huge new grant-making foundations, most notably the Bill & Melinda Gates Foundation, which in 1999 rocketed to the top spot among the nation’s largest private foundations, with more than $17-billion in assets.

Despite such successes, however, the non-profit world has stumbled at times. In the late 1980s and early 1990s, several scandals rocked the televangelism world. And in 1995, former United Way of America president William Aramony was convicted of defrauding the non-profit federation. Also in 1995, the Foundation for New Era Philanthropy, which solicited investments largely from Christian institutions, folded after taking in about $350-million in what had amounted to a Ponzi scheme.

In other ways, too, the failure of the non-profit world to police itself has invited reproach. As the booming economy has led wealthy Americans to seek new tax-shelter methods, for example, some have turned to schemes that are reminiscent of the abuses of the private-foundation era of the 1960s. In recent months, the federal government has shut down several questionable giving techniques.

At the dawn of the third millennium, philanthropy faces a whole new set of challenges, ones that Andrew Carnegie and his contemporaries could never have envisioned. How, for example, should charities use new technology like the Internet to engage donors? And how much will charities reap from the expected trillions of dollars in wealth that younger generations are expected to inherit in the next 50 years?

One issue is not new, however. Indeed, it hearkens back to the Carnegie era and its quest for innovative ways to deal with age-old social problems such as poverty and homelessness.

In recent years, political conservatives have argued that philanthropy should adopt a 19th-century model of charity, with humanitarian and religious groups shouldering greater responsibility for short-term social needs. But others worry that such a trend could thwart philanthropy’s effectiveness at finding broad, holistic approaches to cultural and social issues.

“Reorienting philanthropy to a 19th-century model would deny the insights of Rockefeller and Carnegie,” says Mr. Katz of Princeton. “They believed that there needed to be a distinction between charity and philanthropy -- that the peculiar, particular job of philanthropy is to think hard about underlying problems and develop long-term strategies to address them.”

ALSO SEE:

A SPECIAL REPORT on philanthropy at the millennium: looking ahead and looking back.

Philanthropy in the 20th Century: Key Events

1907
Margaret Olivia Slocum Sage creates the Russell Sage Foundation to make grants to improve social and living conditions in the United States.

1907
The first Christmas Seals are sold by Emily Bissell in the Wilmington, Del., post office to raise money to fight tuberculosis. The effort raises more than $3,000.

1909
The National Association for the Advancement of Colored People is formed. Within four years, the Boy Scouts of America, Girl Scouts, American Cancer Society, and Goodwill Industries also are created.

1911
Andrew Carnegie, whose 1889 essay “Wealth” articulated the philanthropic duties of the wealthy, gives $125-million to create the Carnegie Corporation of New York.

1913
John D. Rockefeller creates the Rockefeller Foundation with a $35-million donation.

1913
Congress imposes the personal income tax.

1914
Frederick Goff, president of the Cleveland Trust Company, forms the nation’s first community foundation in Cleveland.

1917
For the first time, Americans are allowed to take tax deductions for their charitable gifts.

1918
Americans give more than $400-million in gifts and membership dues to the Red Cross in less than two years in connection with World War I.

1918
The first charity watchdog group is created in response to charitable fund raising related to World War I.

1918
Executives of 12 fund-raising federations form the American Association for Community Organizations, a predecessor to United Way of America.

1919
Charles Ward and Lyman Pierce form what is widely believed to be the first professional fund-raising consulting firm, working in behalf of the YMCA. Similar fund-raising firms proliferate during the 1920s.

1927
The American Council on Gift Annuities is formed.

1929
The Great Depression begins. For a decade it strains the resources of charities. It also leads to New Deal programs that shift responsibility for social welfare from the non-profit world to government.

1934
A new federal law says that organizations cannot be exempted from taxes if they devote “a substantial part” of their activities to propaganda and lobbying.

1935
Congress allows corporations to claim a tax deduction of up to 5 per cent of taxable income for charitable donations.

1939
The start of World War II creates intense demand for non-profit programs that offer international war relief.

1942
The U.S. Treasury Department creates the Form 990 informational tax return, on which groups are required to report on their finances.

1945
The United Nations is created, fostering international-relief programs through non-governmental organizations.

1949
The predecessor of the Council on Foundations is created “to promote responsible and effective philanthropy” among grant-making foundations and corporations.

1949
President Harry Truman, in his inaugural address, lays out a plan to attack world poverty that involves a coalition of government agencies and non-profit organizations.

1950
Congress makes parts of the Form 990 informational tax return available to the public and requires non-profit groups to pay tax on income from businesses that are unrelated to their charitable purposes.

1954
The GE Fund, the corporate-giving arm of General Electric, becomes the first entity to match employee and retiree contributions to charity.

1960
The predecessor of the National Society of Fund Raising Executives is formed to encourage philanthropic giving and ethical charity solicitations.

1961
President John F. Kennedy establishes the Peace Corps, creating opportunities for American volunteerism worldwide.

1961
The Combined Federal Campaign, which raises money from government employees, is created.

1961
U.S. Rep. Wright Patman, Democrat of Texas, holds hearings on alleged financial abuses by foundations.

1964
President Lyndon Johnson begins his War on Poverty, creating numerous programs that provide support to non-profit groups that provide health care and social services.

1964
The Economic Opportunity Act creates the Volunteers in Service to America (VISTA) program, which encourages Americans to give their time to antipoverty programs.

1969
Brotherhood Crusade Black United Fund, the first in a series of fund-raising federations created as alternatives to United Ways, is formed.

1969
Congress requires foundations to limit their involvement in political action and to devote a minimum percentage of their assets each year to charitable purposes.

1973
John D. Rockefeller III creates the Commission on Private Philanthropy and Public Needs and asks John Filer, an insurance executive, to run the organization.

1974
To coordinate enforcement of charity laws across state lines, state attorneys general form a new coalition.

1976
The National Committee for Responsive Philanthropy is created to represent the interests of groups that many people felt were being neglected by established philanthropy.

1976
Congress loosens lobbying restrictions that apply to charities.

1979
A group of Christian leaders creates the Evangelical Council for Financial Accountability to promote ethical behavior among Christian organizations.

1980
The National Council on Philanthropy and the Coalition of National Voluntary Organizations merge to create Independent Sector, which represents grant makers and charities.

1980
The Carter Administration opens the Combined Federal Campaign to local charities and to a handful of national groups in addition to United Way and other traditional participants.

1980
The U.S. Supreme Court strikes down an Illinois law requiring charities to spend a minimum percentage of the donations they receive on programs.

1981
The Statute of Liberty-Ellis Island Foundation begins using corporate sponsorships to raise money to renovate the Statute of Liberty, signaling the advent of “cause-related marketing.”

1981
President Ronald Reagan takes office. His Administration makes major cuts in federal social-service programs, including many that funneled money to non-profit organizations.

1981
Congress raises the amount of charitable contributions that corporations can write off annually to 10 per cent of taxable income, up from 5 per cent.

1983
The U.S. Supreme Court rules that non-profit organizations are not entitled to tax-exempt status if they operate “contrary to established public policy” and are “at odds with the common community conscience.”

1984
New federal rules allow those who contribute stock to private foundations to deduct the full market value instead of the initial cost of the shares. The temporary provision is made permanent in 1998.

1984
The U.S. Supreme Court says that states cannot limit the percentage of charitable donations that non-profit groups can spend on fund raising.

1985
Federal legislation ends efforts by the Reagan Administration to bar advocacy organizations from participating in government on-the-job charity campaigns.

1986
Congress overhauls the tax code and takes away charitable deductions for people who don’t itemize deductions on their returns.

1987
New IRS rules require non-profit groups to show their Form 990 informational tax returns to anyone who makes a request in person.

1989
Televangelist Jim Bakker is convicted of defrauding followers of his Praise The Lord (PTL) ministry of $158-million. He serves five years in prison.

1992
William Aramony resigns as president of United Way of America after being accused of defrauding the organization of hundreds of thousands of dollars. He later is convicted of criminal wrongdoing.

1995
The Foundation for New Era Philanthropy, which defrauded charitable institutions and major donors of more than $350-million, collapses.

1996
Congress passes a law that enables the IRS to penalize charity officials who receive or approve inappropriately high compensation. The law also requires non-profit organizations to make their Form 990 informational tax returns easily accessible to the public.

1996
Congress overhauls the welfare system and encourages governments to give money to private groups, including religious organizations, that provide services to people moving off of welfare.

1997
President Clinton and three former Presidents hold a meeting of business, government, and non-profit leaders to encourage Americans to volunteer to help needy children and get them to pledge to take specific actions.

1999
Microsoft executive Bill Gates and his wife, Melinda, contribute three gifts totaling $16-billion to create the nation’s largest philanthropic organization.

1999
President and Mrs. Clinton hold the first-ever White House conference on philanthropy.

Compiled by Thomas J. Billitteri and Anthony Giorgianni