With only a smidgen of hyperbole, the columnist Joseph Alsop commented in 1974 that “I have begun to think that the 1970s are the very worst years since the history of life began on earth.” A little strong perhaps, but Alsop reminds us of something that today, especially among generations who were spared having to live through the 1970s, tends to get lost in the haze of nostalgia.
In his recent history of the 1970s, How We Got Here, David Frum observes that the things we remember—the clothes, the music, and the hair—tend to be the relatively harmless ones. The catastrophes we’d sooner forget. The energy crisis, Watergate, our humiliation in Vietnam, the rise in world terrorism culminating with the taking of American hostages in Iran, and the worst economic conditions since the Great Depression were all part of that dreary decade. And we might well add to this list the crisis of philanthropy that occurred during that decade.
In a 1970 speech, financier Peter G. Peterson declared: “Our assessment of present and future needs of America’s charitable organizations leads us to believe that the American public must face two harsh facts: First, that the needs of America’s vitally important charitable organizations are rapidly rising, and second, without important sources of new funds that will amount to many billions of dollars, we will feel the full force of what we can call in advance the Charitable Crisis of the 1970s.”
By the end of the decade, things looked no better. In 1978, John D. Rockefeller III would observe that “the invisible sector”—the private nonprofit sector—“is eroding before our very eyes.” He added, “The ominous fact is that the pace of philanthropic giving has steadily lost ground in recent years.” And Americans seemed to have lost confidence in their ability to deal with the nation’s social problems. “If big government can’t solve them,” Rockefeller wrote, “the individual citizen might reason, ‘What can I do?’” Nothing less than the future of American democracy was at stake, he grimly warned.
Stagflation and Steak Houses
We’ve come a long way, baby. Since Rockefeller’s worried assessment, charitable giving has grown from $39 billion to $190 billion, the number of nonprofits has grown from 290,000 to 700,000, and the number of foundations has grown from around 23,000 to more than twice that number. Foundation giving, meanwhile, has exploded from $4.8 billion to $22.8 billion. Yet, lest we assume that the current economic boom is going to last forever, it may be worth taking a look back at the crisis of the 1970s.
The decades after World War II were the most prosperous in American history to that point. Philanthropy was riding high in the 1960s, and philanthropic elites had been lulled into a sense of false security. A wretched confluence of economic and political events would bring the philanthropic world to its knees in the 1970s, and it is fair to say that it did not know how to react. The two most important culprits were abysmal economic conditions, marked most importantly by nearly a decade of inflation and stagnant growth, and government interest and intervention in the world of philanthropy, most importantly in the form of the Tax Reform Act of 1969.
The economic history of the 1970s is well known. In his excellent book, Frum supplies the gory details. Between 1972 and 1975, the median price of a new house increased by 50 percent. Between 1972 and 1973, the cost of meat, poultry, and fish increased by 40 percent, “so fast,” Frum notes, “that steak house menus arrived with stacks of little white handwritten stickers over their printed prices.” An ounce of gold cost $35 in 1970, $875 in 1980. Conditions were so bad that by 1980, Business Week would declare, “The U.S. is in danger of becoming another Brazil, with an intolerably high rate of inflation institutionalized. The result will be an end to the democratic system.” As Frum notes, “it all seemed sickeningly plausible. No eye could penetrate to the bottom of the 1970s economic slump.”
Nor was philanthropy spared. After growing at a rate of more than 5 percent from 1955 to 1965, charitable giving slowed to half that in the period from 1965 to 1975 (and slowly sped up again after 1975). The “birthrate” of new foundations slowed in the 1970s by as much as 59 percent. Around 400 foundations with assets of more than $1 million were established in the 1970s, half as many as had been founded in the 1960s and a third as many as in the 1950s. Foundation assets were hit as well, declining by 30 percent from 1972 to 1975 and merely remaining stable from 1975 to 1981. In 1970, only one foundation (Ford) had an endowment of more than $1 billion. By the end of the decade, that still remained the case. (Today, a $1 billion endowment barely makes the top 50.)
Those Mysterious Foundations
But other trials were in store for the philanthropy world. Beginning in 1961, a maverick congressman from Texas named Wright Patman had begun a decade-long crusade against what he perceived as the arrogance, secrecy, and financial skullduggery of foundations. In 1962, he was permitted to hire a staff and his House Small Business Committee began publishing a series of reports detailing foundation abuses of the law and the trust of the American people. And while Patman was arguably overzealous, foundations would give him (and his fellow critics) plenty of ammunition. If the 1960s were a period of economic health for foundations, they would prove to be a public relations nightmare. A few examples are illustrative.
In 1967, the Ford Foundation would make a controversial grant to the Cleveland branch of the Congress of Racial Equality for (among other things) a voter registration drive in predominantly poor, black neighborhoods. The grant probably would have been forgotten had it not landed right in the middle of a contentious mayoral race that was eventually won by the challenger, Carl Stokes, an African American who had clearly benefited from the new registrants. While Ford would later argue that they were doing no more than performing a public service for poor blacks, it looked to many observers as if they had inserted themselves into the political process on the side of a particular candidate. The Boston Globe would editorialize, “If one foundation can help elect a good mayor, why cannot another elect a bad one?”
In May of 1969, Life magazine would run a story (based on a federal grand jury leak) alleging that in 1966, Supreme Court Justice Abe Fortas had received a payment from the Wolfson Family Foundation, which had been started by a businessman who had since been sent to prison for SEC violations. Fortas had returned the payments in 1965, but the 1969 revelations would drive him from the bench. In his foundation expose, The Money Givers, journalist Joseph Goulden quotes a foundation executive who called the Fortas grant “the grant heard round the world.” Goulden notes that the Fortas grant was hardly typical of foundation philanthropy of the time. But, “to the public, Fortas’s indiscretion was further evidence that these mysterious foundations, with their penchant for generous grants and privacy, were out to subvert the nation.”
Needless to say, the timing couldn’t have been any worse. The cumulative effect of Patman’s investigations, an important 1965 Treasury Department report on foundations, and the numerous foundation missteps meant that Congress had to act. In January of 1969, the House Ways and Means Committee would begin hearings on tax reform, and philanthropy would be high on the list of topics to be addressed. In a speech before the committee on the opening day of hearings, Patman would ask, “Are the giant foundations on the road to becoming political machines? . . . Does the Ford Foundation have a grandiose design to bring vast political, economic, and social changes to the nation in the 1970s? I need not tell you gentlemen what can happen in a local, state or national election where this kind of money is turned loose, directly or indirectly, in behalf of their favorite candidates.”
Congress would end up passing an elaborate array of regulations on foundations, including, among other things, a 4 percent excise tax on net investment income (later reduced to 2 percent), a prohibition against using a charity as a front for self-dealing, a three-tiered payout requirement (later standardized to the current 5 percent), and a limit on the amount of a company a foundation could hold. Reactions from the foundation world were harsh. Alan Pifer, then president of the Carnegie Corporation, commented, “From what I have witnessed in Washington in recent months, it is my sad conclusion that the role played by free private institutions as a bulwark of the American democratic system may be in jeopardy.”
Once the immediate alarm subsided, leaders in the philanthropic world gathered together to craft a response. They would decide, according to sociologist Peter Frumkin, upon a two-pronged strategy: “First, through an aggressive campaign mounted by their national association, private foundations abandoned any claim to privacy and recast themselves as public institutions that were open and accountable to all; second, they took important steps to professionalize foundation work as part of a quest for greater legitimacy.”
The foundation world would spend the rest of the 1970s building alliances, forming groups, coalitions, and commissions (such as the well-known Filer Commission) in order to construct a bulwark against future critics. How well did they do? By the mid 1980s, long-time foundation watcher Waldemar Nielsen, who had been harshly critical of the Tax Reform Act in the immediate aftermath, would say that “although it contained some elements of overkill, [the Act] was on the whole a most effective piece of legislation. It corrected the worst of abuses of the foundation device by donors and their associated companies . . . . The result is that general confidence in the value of foundations both in Congress and across the nation has not only been restored but has now probably reached its highest point in history.”
It seems clear today that the 1970s were a mixed blessing for philanthropy. After ignoring its critics for too long, a confluence of fiscal and political crises forced the philanthropy world to spend the decade of the 1970s reevaluating itself and its purposes. From our current vantage point, we might conclude that the answers they arrived at—to pull together, take on a quasi-public countenance, and to become more professionalized—weren’t entirely satisfactory. We have all heard calls for foundations to be more generous, accountable, and innovative. For instance, the debate over whether foundations ought to raise their payout rate has left many philanthropic leaders on the defensive.
At least philanthropy was able to respond to the political attacks. In order to see their portfolios and their grant budgets begin to grow again, they had to wait until inflation subsided and the economy began to expand once again. This only goes to show that the most important factor in the renewal of philanthropy was neither the Tax Reform Act of 1969, the Filer Commission, or any of the other totems of philanthropy in the 1970s. It was, rather, prosperity—the most productive two decades in history. We ought not to lose sight of that. Philanthropists can fret about accountability or the payout rate until the cows come home, but without a healthy, prosperous economy, those concerns won’t matter very much.
John W. Barry is a contributing editor to Philanthropy.