The Use and Abuse of Endowments

I

No question was more vigorously debated by the economists of the eighteenth century than the distribution of private accumulated wealth in the form of continuing trusts or endowments. To appreciate the significance of this discussion one needs to keep in mind the background of history which gave rise to the discussions, and to remember as well two facts. First, that the establishment of charitable trusts can only take place in a nation where great accumulations of wealth go hand in hand with a widespread spirit of public service. Great charitable trusts do not arise in povertystricken countries, or in countries where the people are trained by long political experience to look to government for the support of all charitable causes, including religion and education. The problem of the charitable trust is not acute in a rich country like France or in a poor country like Rumania. It comes to be significant only in countries where great accumulations of wealth in the hands of individuals are united with a distinct sense of responsibility to the public good. It is a by-product of individualism.

In the second place, one needs to remember that, while we speak of a science of economics, there is no science of economics in the exact sense in which we think of the physical sciences. The economist is in somewhat the same situation as the psychologist. He seeks to deal, according to the methods of inductive science, with a complicated mass of facts and tendencies, all of them affected by imponderable human forces. The psychologist can never eliminate his own psychology from his thinking, nor can the economist eliminate his own social and political outlook from his conclusions and predictions. The question of the wisdom or unwisdom of endowments must in the long run be settled by the verdict of experience. It is not possible to dogmatize as to the future.

Among the early economists who sought to deal with the problem was Turgot (1727—1781): —

But of whatever utility a Foundation might be at its conception [he writes], it bears within itself an irremediable defect which belongs to its very nature — the impossibility of maintaining its fulfillment. Founders deceive themselves vastly if they imagine that their zeal can be communicated from age to age to persons employed to perpetuate its effects. There is no body that has not in the long run lost the spirit of its first origin.

France is perhaps the most striking example of the fact that the creation of such trusts or endowments in any nation is directly related to the individualistic tendencies in its citizenship. In France the Revolution put an end to individualism, and since that day the supervision of the State has been so minute and detailed as to discourage charitable endowments. Present-day French writers on economic subjects deplore this fact.

Adam Smith, the contemporary of Turgot, was no less emphatic in condemnation of the perpetual endowment. While he admitted the advantages of a school foundation for elementary education, he argued that higher education and religion would develop more wisely if left to make their way in accordance with the demands and desires of those composing the social order: —

Were there no public [endowed] institutions for education, no system, no science, would be taught for which there was not some demand or which the circumstances of the times did not render it either necessary or convenient or at least fashionable to learn. A private teacher could never find his account in teaching either an exploded and antiquated system of a science acknowledged to be useful, or a science universally believed to be a mere useless and pedantic heap of sophistry and nonsense. Such systems, such sciences, can subsist nowhere but in those incorporated societies for education whose prosperity and revenue are in a great measure independent of their reputation and altogether independent of their industry.

Adam Smith’s argument against the subsidizing of education and religion called forth energetic replies on the opposite side of the question. One of the most noted of these was that of the famous Dr. Thomas Chalmers, Professor of Moral Philosophy in the University of St. Andrews, under the title, The Use and Abuse of Endowments. His argument dealt wholly with literary and ecclesiastical endowments, and particularly with the latter. In presenting his arguments for an established church, he found it unnecessary to consider the case of the United States, the only large country which had no such establishment. The experience of the United States, he remarked, was at best doubtful (he wrote in 1827), and in any case the United States was ‘a dim and distant region.’ At the end of a century this ‘dim and distant region’ has become the field for the establishment of the most generous endowments for intellectual, social, and moral causes that the world has ever seen.

II

The only country whose experience sheds light upon the history of charitable trusts is England, for only in England has the necessary wealth to create such trusts been unhampered by government and at the same time stimulated by a sense of responsibility to the public good on the part of private owners of wealth.

A ‘charitable trust’ in the legal sense in England is one that exists for some eleemosynary, educational, religious, or governmental purpose; that has an undefined beneficiary; and that constitutes a perpetuity. All endowments existing for purposes similar to those of the philanthropic foundations in the United States would therefore come under this description. Up to the earlier years of the nineteenth century the charitable trusts in England had existed without governmental or other scrutiny, but between the years 1816 and 1837 a parliamentary commission investigated the conditions and activities of the charitable trusts in all parts of England and Wales. The following charitable trusts were exempt from investigation: —

1. The universities of Oxford and Cambridge; the colleges of Westminster, Eton, and Winchester; the schools of Harrow and Rugby; and the Corporation of Trinity House.

2. All charities having special visitors, governors, or officers appointed by the founder. (Such charities were, however, included in 1831, and among them were found some of the worst cases of abuse.)

3. Charities instituted wholly or principally for the benefit of Jews or Quakers, as well as those wholly or principally supported by voluntary subscriptions.

The detailed reports of these commissions respecting the widely diverse charitable trusts brought out, as may well have been expected, numerous weaknesses and some breaches of trust. For example, nearly all of the charitable funds in London were, in 1828, under the control and management of some ninety-one city companies, and their annual income amounted to £138,583. One of these charities, St. Paul’s School, London, was founded by John Colet, Dean of St. Paul’s, and came into the hands of the Mercers’ Company after his death in 1519. At that time the members of the Mercers’ Company were mercers. In 1828 they were mostly merchants, bankers, and insurance brokers. In 1524 the endowment produced an annual income of £122. In 1820 it produced an income of £5252. The examination of the administration of the Mercers’ Company in 1828 showed that in 1804 the company had spent £34,600 of the surplus revenue of the school in speculations, loans, and other ways having no bearing on the institution. In 1828 this was being repaid at the rate of £1000 annually and invested in public funds. The management of the school estate, as carried out by the Mercers’ Company, was in the hands of two annually elected officers called the surveyoraccountant and assistant surveyor. Salaries to the four masters of the school were respectively £600, £300, £220, and £200, making with emoluments a total cost for instruction of £1513. The officers representing the Mercers’ Company were paying a late ‘highmaster’ a pension of £1000 annually, an amount bearing an unusual relation to the salary of £600 paid to the active highmaster. In spite of the increase in the endowment, under the administration of the Mercers’ Company, the attendance at the school had been allowed to stand at the number fixed in Colet’s time, 153, adopted because of the number of fish taken in Saint Peter’s famous catch!

Following the report of these various commissions, a permanent board of commissioners was created. It had, at first, only protective and remedial powers, but judicial powers were given it in 1860. Certain charitable trusts, however, have always been exempt from the authority of the Board, except as they voluntarily sought its advice. Roman Catholic charities were brought under its jurisdiction in 1859, and endowed secondary schools in 1874. In 1899, the educational charities were assigned to the Board of Education.

As a matter of fact, the abuses which this investigation of English charitable trusts brought to light were far from being universal. The absence of any strict oversight and the presence in the management of trust funds of trustees not chosen for their fitness had resulted in a far less equitable and effective administration of some trusts than ought to have been secured.

In pursuance of the conclusions of the charity commissioners who are charged with a supervision of the permanent trusts, such trusts in England to-day are under a sharp scrutiny. Even the investments are under the control of the commissioners. The oversight of the commissioners does not extend to the universities of Oxford and Cambridge and to colleges like Westminster, Eton, and Winchester, or to schools like Harrow and Rugby.

III

In the United States the past thirty years have seen an extraordinary devotion of private fortunes to the establishment of permanent endowments. The great bulk of such endowments are held by the colleges and universities, sometimes for stated causes, but in large measure for the general purposes of the institutions. During the same period a number of endowed foundations have been created, notably those established by Mr. Carnegie and Mr. Rockefeller and, more recently, by Mrs. Harkness, Mrs. Sage, and Mr. Rosenwald. Perhaps over a thousand millions of dollars are to-day held in trust by these foundations.

Their number and magnitude have served to raise the question whether endowments are being provided in cases where the agencies so endowed should depend upon the support of a constituency for their life and usefulness. This question is most opportune. Few would be found to question the statement that too many causes in the United States have been buttressed by endowments. It seems axiomatic that religious congregations, political parties, and social clubs are not fitting agencies to receive endowments. Their very reason for existence lies in their ability to enlist the coöperation of those who make up their constituencies.

It is perfectly clear also that, human nature being what it is, the thirst for endowments will grow out of proportion to any reasonable justification. There is no injunction in the Scripture which has been so thoroughly accepted by the promoters of good, as well as of mediocre, causes as that which sets forth the fact that they who seek find; to them who ask shall be given; and to those who knock the door shall be opened. Knocking on the doors of the charitably minded has become a business.

This process has by no means been confined to individuals. The demands of an enormously expanded educational programme, backed by energetic propaganda, are taking from the treasuries of states and of communities sums of money never dreamed of in any other country. In a certain prosperous city of several hundred thousand inhabitants, over 60 per cent of the total municipal income is expended on the school system. If the present régime continues, its plans will absorb all the income of the municipality in another score of years unless the patient taxpayer rebels or the conception of what constitutes education is modified.

It is true that endowments in our generous easy-going citizenship are being unwisely sought and unwisely given, just as the tax funds of the community are drawn upon in the name of charitable (generally educational) causes. But this does not touch the question, Is the perpetual endowment, whether entrusted to a university or to a special board of trustees, likely to prove a wise and fruitful agency in civilization?

IV

The perpetual charitable trusts, as they exist in the United States, whether in the hands of a university board or of a special board of trustees, fall into two classes. They are endowments whose incomes are intended for the support of a stated cause, or they are endowments whose incomes are to be used, in the discretion of their trustees, for the support of agencies that are considered to promise well in their respective fields. The first form of trust uses its income as an operating agency in a designated field; the second form of trust is a giving agency distributing its income to such institutions, societies, or individuals as are judged to be capable of effective work in human advancement.

To illustrate. The Carnegie Institution of Washington is devoted to research in pure and applied science. It expends the income of its endowment in conducting, through its own members and laboratories, researches in astronomy, geophysics, nutrition, terrestrial magnetism, and other fields of research. It does expend part of its income in subsidies to research associates working in their own universities in the scientific fields in which the Institution is active, but it is essentially an operating agency in the wide field of scientific research.

On the other hand, the Carnegie Corporation of New York is, by the terms of Mr. Carnegie’s deed of gift, to apply its income ‘to promote the advancement and diffusion of knowledge and understanding among the people of the United States by aiding . . . institutions of higher learning . . . and by such other agencies and means as shall from time to time be found appropriate therefor.’ In other words, this endowment is primarily a giving agency whose purpose is to stimulate and strengthen the agencies already engaged in the advancement and diffusion of knowledge, or to create new agencies if they are thought desirable. It is a giving rather than an operating organization.

As a matter of fact, to one who examines the various types of charitable trusts that have been established in the United States in the last three decades, it is clear that in the establishment of the second type of charitable trust just referred to the founders of such agencies were seeking to develop a science of giving. Knowing from their own experience the difficulty of discriminating between the multitude of appeals, they undertook by the establishment of these large trusts, devoted not to one cause but to many, to develop an agency, continuous for generation after generation, that would be able to discriminate between causes that were significant and those that were transitory, and would year by year and century by century make its contribution to those agencies in the social order that experience and study had shown to be fruitful. Perhaps unconsciously, but none the less truly, notable givers like Mr. Carnegie and Mr. Rockefeller were feeling after a science of giving to be exemplified in an agency which should itself be continuous and which should compare and study the numberless causes that appealed for aid from the standpoint of an impersonal scientific view of human efforts for betterment. Whether a science of giving is attainable is another question. It would naturally be a division of the science of economics!

v

The a priori argument of the economists against the creation of endowments is virtually an argument against all continuing organized agencies in the social order. Every such agency — governmental, educational, social — carries in itself not only the seeds of possible decay, but also the tendency to exalt the machinery of organization above the original purpose for which the organization was created. Particularly is this true of organizations that seek to promote intellectual and moral causes (I omit the word ‘spiritual,’ which has been so overworked in recent years that it deserves a rest). The organized Christian Church converted in the fourth century a Roman emperor, and proceeded to develop the machinery of civil government which completely transformed its spirit and ideals. Our American colleges have certainly gone far in the last three decades toward a form of organized activities that has obscured the primary intellectual purpose for which they were instituted.

Business organizations are subject to exactly the same tendencies, as any man knows who sits on boards of directors. But in a business organization there is a sharp test of efficiency lacking in those organizations that deal with intellectual and social products. A business enterprise is intended primarily to earn money. When dividends are no longer forthcoming, something is fundamentally wrong with the organization, and a sharp, sometimes drastic, reorganization takes place. The machinery of organization is once more readapted to the work it is intended to do, or else it is scrapped.

There is no such sharp criterion by which to test social organizations. It is so difficult to know whether a government, or a university, or a religious organization, is really paying dividends or not. Intelligent judges will differ in their judgment of the work of any designated social agency. We know that tendencies toward deterioration and toward a substitution of machinery for ideals are always present. But we cannot scrap our organized governments, churches, universities, and school systems every quarter century and start new ones. These agencies are in their nature continuous. So long as the social order itself continues and grows and deals with the wants and aspirations of one generation after another, it adapts its machinery as best it can to new conditions and new demands.

The perpetual charitable trust is precisely in the same situation, provided it is sufficiently flexible to be adapted to the changing demands of human development. It has no counsel of perfection, but it has a distinct opportunity for service of great significance. Its possibilities of misuse are precisely the same as those of other agencies intended for the advancement of society.

The weaknesses of the English trusts as disclosed by the long parliamentary study were: (1) the devotion of a permanent endowment to a temporary or insignificant cause; (2) the choice of trustees ill qualified to direct the trust, and who were in some cases interested in its benefits; (3) the lack of public scrutiny and responsibility; (4) the lack of any authority in the trustees to modify the methods and the objects of the trust with the changing demands of the time, while still seeking to serve the general cause the founder of the trust had in view.

The charitable trusts founded in recent years in the United States have been planned with a view to avoid these weaknesses. They are in the first place public institutions, chartered by the Congress or by a state legislature. They are not only subject to the scrutiny and control of the public, but they have adopted a policy of open publicity as to the expenditure of their funds. Finally, the trustees hold their trust under conditions which enable them to adapt it to the changing needs of a new generation. They are continuing trusts, but they are serving continuing causes, and there is exactly the same reason to expect that they will adapt themselves to new conditions that exists in all other social organisms.

There is reason to hope that the perpetual charitable trust will serve a notable rôle in dealing with the problems of the future. It will gather knowledge from its own experience. It is hampered by no constituency. It has sufficient freedom to adventure in the cause of human progress. In this day of intellectual and social inflation the presence of some social forces binding together the past and the present may prove invaluable to the cause of human progress. A continuing endowment in Alexandria or Athens or Rome in the first century could not have survived the violent political changes of the next ten centuries. But we can well believe that such a trust devoted to the advancement and diffusion of knowledge among men might have advanced the cause of human progress a half millennium beyond its present stage!

VI

Mr. Carnegie was a keen student of Adam Smith, but he parted company with him on the question of the perpetual trust. He was influenced in large measure by two beliefs, which became so large a part of his thinking that they were the foundations of his social creed.

The first was a profound faith in mankind. To the end of his life Mr. Carnegie was an optimist in his view of human nature. He let no personal disappointment, and he had many, shake his faith in men and in the future of human progress. He created permanent endowments in the promotion of various great causes not because he believed these agencies would always function at the maximum efficiency; all human organisms, he was wont to say, have their periods of activity and of commonplace performance. But taking the long view, looking to generation after generation, he had confidence that successive groups of trustees would deal wisely and justly with their responsibilities.

Secondly, he counted on the freedom given to his various boards of trustees to enable them to meet the varying needs of future generations while preserving the great underlying purpose for which the trusts had been created. He had faith in men and in their common sense if given reasonable freedom of action.

In one of the last of the great perpetual trusts that he established these two articles of faith were strikingly shown. In establishing the Endowment for International Peace he looked forward to a time when international peace would be a fait accompli. He accordingly left to his trustees the following message: ‘When . . . war is discarded as disgraceful to civilized men . . . the trustees will please then consider what is the next most degrading remaining evil or evils whose banishment . . . would most advance the progress, elevation, and happiness of man, and so on from century to century without end. . .’ It was a long look ahead by an indomitable believer in his race.

This faith that the great endowments, designed to live forever, might render notable service in the emergencies of civilization had a striking illustration when our nation swept into the World War. Under the freedom of action given them, the trustees of the Carnegie Corporation were able to pour great sums of money into the support of the suffering millions whom the war had devastated. The perpetual trust is an act of faith in mankind itself. Of this faith Mr. Carnegie was the great exemplar.

VII

This paper has been written in the endeavor to point out that the presentday endowed charitable trust has a place in the social order, and that it has sufficient elasticity to adapt itself to changing needs so that it will continue to fill a real want in the future.

The alternative to the permanent endowment is a sum of money to be spent, principal and interest, at the discretion of the trustees at the time. It is being urged by some of the most generous givers that all public giving shall be in this form. An endowment of a university, for example, may be spent, principal and income, by the trustees at their discretion; or a charitable trust shall be founded on the condition that the principal shall be distributed by the trustees in a stated term of years.

Such gifts may be of great value as supplements to endowments, but the objection to making all public gifts in this form are serious and lie in the qualities of human nature itself. To illustrate. A university has an endowment to carry on a certain work in education or research. It is ambitious to extend and enlarge its activities. Sometimes this urge to expand is wise; not infrequently it is the result of a temporary ambition, or of competitive zeal. If the rate of spending is suddenly raised by dipping into principal, the probable outcome is an inflated programme which in a few years leaves the work in straits. Such a procedure may in particular instances be wise; as a general policy it spells extravagance and subsequent deflation. Human nature being what it is, it is wiser to retain a certain steady support and get other money for expansion. Our universities to-day are ready to adventure in any field. The responsibility of conserving an endowment is more often a reasonable restraint than a detriment. The same thing is true of a charitable trust to be liquidated in a fixed term. Twenty-five years has been named as a fitting period.

It is not difficult to see what would happen to a large trust under such conditions. Those responsible for it would go carefully about their task in the endeavor to find fruitful and significant causes. With the best intentions in the world they would find themselves approaching their limit of time with a large part of the endowment still in their hands. They would then be compelled to distribute this in huge grants. There is no wisdom in this process.

The truth is, there is no formula of public giving that will fit all cases.

Both the permanent endowment and the gift that must be liquidated in a fixed term have their places. The real problem in the administration of great public gifts, whether of one sort or another, is to find some man (or some group of men) who will give himself with his gift, who will get down from the chair of the giver and obtain a firsthand knowledge of the circumstances, the motives, and the imaginings of those whom he seeks to aid or to stimulate. Such a man when he refuses aid often renders his greatest service by making clear the true perspective of the work that seeks a grant. If humanity could be saved by handing out the cash, the generosity of good men would have saved it long ago. To make great public gifts fruitful and not harmful in the ministry of human needs somebody has to sweat blood in the giving.

That the great endowments will come under a sharper public scrutiny and control we may well expect. Whether the endowed universities will be made subject to such scrutiny and control, or be made exempt, as is the case with the great English universities and public schools, is a question that only the future can answer. These foundations have become a distinct feature of American social endeavor. They are distinctive of American citizenship. Whether Mr. Carnegie’s faith shall be vindicated will depend on the wisdom and devotion of those who administer these noble endowments. Of one thing we may be reasonably sure — the problem cannot be solved by surrendering the capital of a great trust to the real, or imaginary, demands of the present moment. Some causes hang on the long result of time. Their contribution to human progress is cumulative. In the service of such causes the continuing trust will find its justification.