Principles of Public Giving

I

THERE are few colleges in the land to-day which are not striving for ‘adequate endowment.’ Museums, orchestras, operas, homes for the aged, hospitals, orphanages, and countless other charitable and remedial organizations, are aiming at the same goal. It was recently estimated that more than two and a half billion dollars were given to various endowments in this country in the last fifteen years. The sum is vast, equal to the total national wealth a hundred years ago, but institutions continue to solicit more and greater endowments, and men of wealth are encouraging them with ever-increasing gifts.

All of this giving and receiving is proceeding without much, if any, attention to the underlying question whether perpetual endowments are desirable. Perhaps the time has come to examine, or rather reëxamine, this question, for it is not a new one in the long history of philanthropy.

I approach this discussion neither as an economist nor as a sociologist, but simply as an American citizen whose experience as a contributor to charitable causes and as a trustee of endowed institutions has given him some insight into the practical side of the problem. My only purpose is to raise the question of how best we may aid in the advancement of public welfare.

We can learn much from British experience, which has been more varied as well as longer than our own. Monasteries, in the earlier centuries, received such enormous grants that Edward I and his successors undertook to limit their possessions. Despite these efforts, it is estimated that shortly before Henry VIII secularized the monasteries between one third and one half of the public wealth of England was held for philanthropic use. This first great struggle between the living State and the dead hand indicated, as Sir Arthur Hobhouse has pointed out, that the ‘nation cannot endure for long the spectacle of large masses of property settled to unalterable uses.’

This experience was reflected in laws intended to restrict charitable bequests in perpetuity, but the endowment of charities of all kinds continued until there was hardly a community in all England without its local fund. So obvious had abuses become that a Parliamentary Commission was created to inquire into the situation. Its preliminary report, published in 1837, filled thirty-eight folio volumes and listed nearly thirty thousand endowments with a combined annual income of more than £1,200,000.

Those who view endowments uncritically might think the condition of English charities fifty years ago happy in the extreme, for less than 5 per cent of the population lived in parishes without endowed charities, all sorts of human needs had been provided for by generous donors, and funds were increasing rapidly. But Mr. Gladstone, who certainly was a humanitarian, rose in the House of Commons to say that the three commissions which had investigated the endowed charities ‘all condemned them, and spoke of them as doing a greater amount of evil than of good in the forms in which they have been established and now exist.'

The history of charities abounds in illustrations of the paradoxical axiom that, while charity tends to do good, perpetual charities tend to do evil. James C. Young, in a recent article, ‘The Dead Hand in Philanthropy,’reports that some twenty thousand English foundations have ceased to operate because changing conditions have nullified the good intentions of the donors; and a large number of American funds, many of them of comparatively recent origin, have likewise become useless.

II

When I was a boy in Springfield, Illinois, the covered wagons, westward bound, rolled past our door. The road ahead was long and full of hardships for the pioneers. They were hardy and self-reliant men and women, but many of them were so inadequately equipped that if misfortune overtook them, as it frequently did, they were almost certainly doomed to suffering, and perhaps death.

The worst hardships and dangers of the Western trail had passed in my boyhood, but there was still use, then, for the Bryan Mullanphy fund, established in 1851 for ‘worthy and distressed travelers and emigrants passing through St. Louis to settle for a home in the West.’ A few years later the trustees could with difficulty find anyone to whom the proceeds of the fund might be given. Some years ago, for lack of beneficiaries, the income had piled up until the fund totaled a million dollars. I have not followed its later fortunes, but, unless the courts have authorized a change in the will, that money is still accumulating, and will accumulate indefinitely. The Mullanphy gift was a godsend in its brief day. The man who gave it found one of the most urgent needs of his time and filled that need precisely. He made only one mistake: he focused his gift too sharply. He forgot that time passes and nothing — not even the crying needs of an era — endures, He deserves to be remembered as a generous-hearted man who realized, perhaps better than anyone else in his generation, that a wealth of pioneer blood and energy was being dissipated in the creation of our American empire. If he is remembered at all, it is more likely as the creator of a perpetuity which lost its usefulness almost as soon as it was established.

Mullanphy’s mistake has been made not once but countless scores of times. It has been made by some of the wisest of men. Benjamin Franklin in drawing his will assumed that there would always be apprentices and that they would always have difficulty when starting in business for themselves in borrowing money at a rate as low as 5 per cent. In addition, he assumed that a loan of three hundred dollars was enough to enable a young mechanic to establish himself independently. With these assumptions in mind, Franklin set up two loan funds of a thousand pounds each. One was for the benefit of ‘young married artificers not over the age of twenty-five’ who had served their apprenticeships in Boston, and the other for young men of similar situation in Philadelphia. The accumulated interest as well as the principal was to be lent out for a hundred years. By that time, Franklin’s calculations showed, each thousand pounds would have amounted to £135,000. One hundred thousand pounds of each fund was then to be spent. The Boston fund was to be used in constructing ‘fortifications, bridges, aqueducts, public buildings, baths, pavements or whatever may make living in the town more convenient for its people and render it more agreeable to strangers. In Philadelphia, he foresaw that the wells which in his day supplied the city with water would become polluted; accordingly, he proposed that Philadelphia’s fund should be used for piping the waters of Wissihicken Creek into the city. Fortunately, Boston provided herself with pavements, and Philadelphia herself with a water supply, without waiting for Franklin’s money. Great as his intellectual powers were, he had miscalculated at every point. The class he proposed to benefit gradually became nonexistent; therefore the funds failed to accumulate as rapidly as he had anticipated. At the end of a hundred years, instead of the $675,000 he had expected in each fund, there were only $391,000 in Boston and $90,000 in Philadelphia, and meanwhile the good works which he had chosen as the grand climax of a career devoted to good works had long been provided.

Benjamin Franklin was a wise man, and so was Alexander Hamilton; yet it was Hamilton who drafted the will of Robert Richard Randall, who in the first years of the last century left a farm to be used as a haven for superannuated sailors. A good many years ago the courts were called upon to construe the word ‘sailor’ to include men employed on steamships. Even so, the fund for Snug Harbor, I am assured, vastly exceeds any reasonable requirement for the care of retired seafarers. The farm happened to be situated on Fifth Avenue, New York. To-day it is valued at thirty or forty million dollars.

I have heard of a fund which provides a baked potato at each meal for each young woman at Bryn Mawr, and of another, dating from one of the great famines, which pays for half a loaf of bread deposited each day at the door of each student in one of the colleges at Oxford. Gifts to educational institutions often contain provisions which are made absurd by the advance of learning. An American university has an endowed lectureship on coal gas as the cause of malarial fever. In 1727, Dr. Woodward, in endowing a chair at Cambridge, England, directed that the incumbent should lecture for all time on his Natural History of the Earth and his defense of it against Dr. Camerarius. it did not occur to the good doctor that his scientific theories might eventually become obsolete; yet, with the passing of years and the progress of scientific knowledge, the holder of the chair had to admit his inability to comply with the founder’s instructions and at the same time execute Dr. Woodward’s plain intent — namely, to teach science. The list of these precisely focused gifts which have lost their usefulness could be extended into volumes, but I am willing to rest the case on Franklin and Hamilton. With all their sagacity, they could not foresee what the future would bring. The world does not stand still. Anyone old enough to vote has seen revolutionary changes in the mechanics of living, and these changes have been accompanied and abetted by changing points of view toward the needs and desires of our fellow men.

I do not know how many millions of dollars have been given in perpetuity for the support of orphan asylums. The Hershey endowment alone is said to total $40,000,000 and more. Orphan asylums began to disappear about the time the old-fashioned wall telephone went out. We know now that it is far better for penniless orphans, as for other children, to be brought up under home influence. The cost of home care for orphans is no greater than the cost of maintaining them in an orphanage. But the question is not one of cost, but of the better interest of the children. Institutional life exposes them needlessly to contagion, and is likely to breed a sense of inferiority that twists the mind. The money which the dead hand holds out to orphan asylums cannot be used for any other purposes than maintaining orphan asylums; it therefore serves to perpetuate a type of institution that most men of good will and good sense no longer approve.

To protest twenty-five years ago that orphans were not best cared for in asylums would have been considered visionary; fifty years ago it would have been considered crack-brained. There is no endowed institution to-day which is more firmly approved by public opinion than orphanages were within the lifetime of any man of middle age. Let that fact serve as a symbol and a warning to those who are tempted to pile up endowments in perpetuity.

III

There is another and to my mind no less grievous error into which many givers still are likely to fall. They conceive that money given for philanthropic purposes must be given, if not for a limited object, then at least in perpetuity: the principal must remain intact and only the income may be spent. The result has been, as many a trustee knows, that institutions have become ‘endowment poor.’ Though they have many millions of dollars in their treasuries, the trustees can touch only the 4 or 5 per cent a year that the money earns. There is no means of meeting an extraordinary demand upon the institution, an extraordinary opportunity for increasing its usefulness. Research suffers; museums are unable to purchase objects that never again will be available; experiments of all sorts are frowned upon, not because they do not promise well, but because money to undertake anything out of the ordinary cannot be found, while huge sums are regularly budgeted to carry on traditional and routine activities. And nothing serves more successfully to discourage additional gifts than the knowledge that an institution already possesses great endowments.

As a trustee of the University of Chicago, I know how difficult the problem is. Opportunities for purchasing libraries or for extending the work of some department into new fields are continually coming before us, and though we have endowments of $43,000,000, we have frequently been unable to authorize the use of even a few thousands for some object which would add much to the University’s resources and usefulness, to say nothing of its prestige. We may not even convert the principal of our endowments into books or men, which are the real endowment of any university.

A number of years ago the University started collecting more endowment. I did not contribute to the fund, but instead turned over a sum of which the principal may be exhausted. That fund, I am assured, has been of considerable service. It has been used for such diverse purposes as the purchase of the library of a Cambridge professor; for paying part of the cost of Professor Michelson’s ether-drift experiments; for reconstructing the twelveinch telescope at Yerkes Observatory; for a continuation of research in glacial erosion in the State of Washington, and for research in phonetics. If the fund had been given as permanent endowment, it is obvious that some of the objects could not have been achieved. The men who desired to undertake experiments and research might have been forced to postpone their investigations; the books purchased might have been scattered among a dozen libraries, never to be reassembled. It is true that money disbursed now will not yield income to the University fifty years hence, but it is also true that fifty years hence other contributors can be found to supply the current needs of that generation.

I am convinced that the timidity of trustees themselves is often responsible for their inability to spend principal. Donors would in many cases be willing to give greater discretion to trustees in such matters if they were asked to do so. A notable example in point is the consent by Mr. Carnegie, more than ten years ago, to the current use of funds which he had given originally for endowment to Tuskegee Institute. At a time when this school was in desperate need of money, I proposed at a meeting of the board of which Honorable Seth Low was chairman and Theodore Roosevelt was a member that we request Mr. Carnegie to permit us to spend not only the interest but also a small portion of the principal of his gift. My suggestion was at first frowned upon. Finally the board agreed, and a letter, dated January 24, 1916, was sent to Mr. Carnegie by Mr. Low which read in part as follows: —

I am writing to submit to you a suggestion which has been made to me by one or two of my fellow trustees of the board of the Tuskegee Institute. Mr. Rosenwald, in particular, who is a generous supporter of the Institute, feels very strongly that a permanent endowment fund is less useful than a fund the principal of which can be used up in fifty years, his idea being that every institution like a school ought to commend itself so strongly to the living as to command their interest and support. . . . In accordance with this suggestion, I am writing to ask whether you would be willing to permit the trustees to use, each year, at their discretion, not more than 2 per cent of the principal of the fund which you so generously gave some years ago toward the endowment of the Institute. It is always possible that within the lifetime of the next generation industrial training for the negro race will be assumed by the state or national government. Should any such change or any unforeseen change in conditions take place, a fund so firmly tied up in perpetuity that the principal cannot be touched, except possibly through an act of the legislature, might be a disadvantage rather than an advantage.

To this Mr. Carnegie’s secretary, Mr. John A. Poynton, replied on February 23, 1916, giving Mr. Carnegie’s approval to the suggestion in the following terms: —

Mr. Carnegie has given careful thought to the proposal that your trustees be permitted to use each year a portion of the principal of the fund which he contributed toward endowment.

In establishing his foundation Mr. Carnegie has favored the plan of giving the trustees and their successors the right to change the policy governing the disposition of the principal as Well as interest when to them it might seem expedient, believing it impossible for those now living to anticipate the needs of future generations. Mr. Carnegie would be happy to have the trustees of Tuskegee assume a similar responsibility in connection with the fund which he contributed toward the endowment of that institute, and asks me to say that he is willing to have a small percentage of the principal used annually for current expenses if three fourths of the members of your board should decide in favor of such a plan.

Here is evidence that Mr. Carnegie might have relaxed the terms of his other gifts had he been asked to do so. It was not the donor but the trustees who were timid. (I have seen trustees act in much the same way in matters of financial administration. Men accustomed to investing a large part of their private fortunes in sound common stocks have felt that as trustees they must invest only in first mortgages or bonds. Of late a good many boards of trustees have enjoyed a change of heart, to the vast benefit of the institutions they serve. But that is a digression.) In some of the institutions with which I am best acquainted, funds given with no strings attached have been added to the perpetual endowment as a matter of course. It is a noteworthy fact, though not as widely known as it should be, that the Rockefeller foundations are not perpetuities. If any of them to-day are wealthier than at their establishment, it is not because the trustees are not free to spend principal when the occasion rises. As a matter of fact, I am told these boards have expended about seventy-five million dollars of their capital or special funds, and it is probable that at least two of them will disburse all of their principal funds within another decade or two.

IV

I am opposed to gifts in perpetuity for any purpose. I do not advocate profligate spending of principal. That is not the true alternative to perpetuities. I advocate the gift which provides that the trustees may spend a small portion of the capital — say, not to exceed 5 or 10 per cent — in any one year in addition to the income if in their judgment there is good use at hand for the additional sums. Men who argue that permission to spend principal will lead to profligate spending do not know the temper of trustees and the sense of responsibility they feel toward funds entrusted to them; nor do they appreciate the real difficulties which face donors and trustees of foundations in finding objects worthy of support. I am prepared to say that some of the keenest minds in this country are employed by foundations and universities in seeking such objects; yet, when a real need is discovered, it often cannot be met adequately, simply because of restrictions placed on funds in hand.

The point has been raised that great institutions must have perpetual endowments to tide them through hard times when new money may not be forthcoming. Those are precisely the times when if is most important to have unrestricted funds which will permit our institutions to continue their work until conditions improve, as they always do. A great institution like Harvard ought not to have to restrict its activities merely because its income for one reason or another has been temporarily curtailed. The spending of a million or two of principal at such a time is not imprudent. Sound business sense, indeed, would commend it.

I am thinking not only of university endowments, but also of the great foundations established to increase the sum of knowledge and happiness among men. Too many of these are in perpetuity. It is an astonishing fact that the men who gave them — for the most part, hard-headed business men who abhorred bureaucracy — have not guarded, in their giving, against this blight. I think it is almost inevitable that as trustees and officers of perpetuities grow old they become more concerned to conserve the funds in their care than to wring from those funds the greatest possible usefulness. That tendency is evident already in some of the foundations, and as time goes on it will not lessen but increase. The cure for this disease is a radical operation. If the funds must exhaust themselves within a generation, no bureaucracy is likely to develop around them.

What would happen, it might be asked, if the billions tied up in perpetuities in this country should be released over a period of fifty or one hundred years? What would become of education and of scientific research? How could society care for the sick, the helpless, and the impoverished? The answer is that all these needs would be as well provided for as the demands of the day justified. Wisdom, kindness of heart, and good will are not going to die with this generation.

Instead of welcoming perpetuities, trustees, it seems to me, would be justified in resenting them. Perpetuities are, in a measure at least, an avowal of lack of confidence in the trustees by the donor. And it is a strange avowal. The trustees are told that they are wise enough and honest enough to invest the money and spend the income amounting to 4 or 5 per cent each year; but they arc told in the same breath that they are not capable of spending 6 or 10 or 15 per cent wisely.

If trustees are not resentful, it is because they know that donors of perpetuities are not thinking in those terms. Sometimes perpetuities are created only because lawyers who draft deeds of gifts and wills have not learned that money can be given in any other way. More often, probably, perpetuities are set up because of the donor’s altogether human desire to establish an enduring memorial on earth — an end which becomes increasingly attractive to many men with advancing years.

I am certain that those who seek by perpetuities to create for themselves a kind of immortality on earth will fail, if only because no institution and no foundation can live forever. If some men are remembered years and centuries after the death of the last of their contemporaries, it is not because of endowments they created. The names of Harvard, Yale, Bodley, and Smithson, to be sure, arc still on men’s lips, but the names are now not those of men but of institutions. If any of these men strove for everlasting remembrance, they must feel kinship with Nesselrode, who lived a diplomat, but is immortal as a pudding.

V

There has been evolution in the art of giving, as in other activities. The gift intended to meet a particular need or support a particular institution in perpetuity was once generally approved, but is now outmoded. There are evidences that all perpetuities are becoming less popular, and I look forward with confidence to the day when they will become a rarity. They have not stood the test of time.

To prove that I practise what I preach, it may not be out of place to say that every donation that I have made may be expended at the discretion of the directors of the institution to which it is given. The charter of the foundation which I created some years ago provides that principal as well as income may be spent as the trustees think best. This year, as the management of this fund was being reorganized, I was anxious to make sure that the trustees and officers would meet present needs instead of hoarding the funds for possible future uses. I have stipulated, therefore, that not only the income but also all of the principal of this fund must be expended within twenty-five years of my death. This I did in the following letter to the board of trustees, approved and accepted by the board at its meeting in Chicago on April 29, 1928: —

I am happy to present herewith to the Trustees of the Julius Rosenwald Fund certificate for twenty thousand shares of the stock of Sears, Roebuck and Company.

When the Julius Rosenwald Fund was created and sums of money turned over, it was provided that the principal as well as the income might be spent from time to time at the discretion of the Trustees, and it was my expectation from the beginning that the entire principal should be spent within a reasonable period of time. My experience is that trustees controlling large funds are not only desirous of conserving principal, but often favor adding to it from surplus income.

I am not in sympathy with this policy of perpetuating endowment, and believe that more good can be accomplished by expending funds as trustees find opportunities for constructive work than by storing up large sums of money for long periods of time. By adopting a policy of using the fund within this generation we may avoid those tendencies toward bureaucracy and a formal or perfunctory attitude toward the work which almost inevitably develop in organizations which prolong their existence indefinitely. Coming generations can be relied upon to provide for their own needs as they arise.

In accepting the shares of stock now offered, I ask that the Trustees do so with the understanding that the entire fund in the hands of the Board, both income and principal, be expended within twenty-five years of the time of my death.

I submitted this letter, in advance, to a wide circle of men and women experienced in philanthropy and education, anticipating a good deal of dissent. There was almost none. Twenty years ago when I, among others, spoke in this vein, our ideas were considered visionary; to-day they are receiving an ever wider approval.

I believe that large gifts should not be restricted to narrowly specified objects, and that under no circumstances should funds be held in perpetuity. I am not opposed to endowments for colleges or other institutions which require some continuity of support, provided permission is given to use part of the principal from time to time as needs arise. This does not mean profligate spending. It is simply placing confidence in living trustees; it prevents control by the dead hand; it discourages the building up of bureaucratic groups of men, who tend to become overconservative and timid in investment and disbursement of trust funds. I have confidence in future generations and in their ability to meet their own needs wisely and generously.