[This post is the fourth in a series on American Exceptionalism. I’ve written on this subject elsewhere, so some of you may want to skip this one.]

In my last post I described the crucial role played by private capital in the development of the remarkable entrepreneurial culture that has given the US such a decisive advantage over other nations. The rest of the world concedes America’s dominance in creating great enterprises – how could they not? – but tends to belittle the achievement by arguing that Americans are simply greedy capitalists who devote all their energy to profitmaking. Other cultures, they argue, are broader in their interests, less commercially focused, more human-centered.

Well, maybe, but it’s interesting to notice that far more American capital has been permanently dedicated to the support of activities that can’t make a profit than to the startup companies I mentioned in the last post. In other words, while an individual might decide to make a charitable gift and might not, once capital has been dedicated to a charitable foundation it’s permanently committed to supporting not-for-profit activities.

Statistics are hard to come by, but there are roughly 90,000 charitable foundations in the world, and roughly 80,000 of them are in the US.(1) How can that possibly be?

One explanation is that in other societies governments do much of the work that private philanthropy does in the US. But that’s to the serious disadvantage of those societies. Governments do many useful things, of course, but they are very blunt instruments when it comes to adapting to change, being innovative, doing small things well, shuttering programs that aren’t working, trying this and that. Just as economies work better when supply and demand decisions are made by millions of individuals rather than by a few government bureaucrats, civil societies work better when social issues are grappled with by tens of thousands of private philanthropies, rather than by one lumbering government.

The US might have evolved in the same direction as other developed countries, except that it was producing so much private capital people began to think hard about how best to deploy that capital. One way to deploy it is in the support of startup companies – see my last post. But another way to deploy it is as startup capital for interesting ideas that can’t make a profit. That, in a nutshell, is a good working definition of a charitable foundation.(2)

Organized, thoughtful philanthropy in the modern sense of the world was developed in my home city of Pittsburgh by Andrew Carnegie. In 1905, when Carnegie sold Carnegie Steel to a group of investors (headed by J.P. Morgan) who formed the United States Steel Corporation, Carnegie became the wealthiest man in the world.(3)

As I’ve noted before (American Exceptionalism: Separated at Birth?, post of 4/18/13), substantial private wealth was a very new phenomenon in human history, and Carnegie gave a lot of thought to what to do with all that money. Ultimately, he decided to give it away, to give it back to the society that had allowed a poor lad from Scotland – too poor to afford to go to school – to rise to become the wealthiest person alive. Carnegie wanted to dedicate his wealth to doing “real and permanent good,” even though none of the activities he would support could ever make a profit.

Of course, doing real and permanent good is extremely difficult – roughly as hard as, say, building the world’s biggest steel company.(4) Nonetheless, Carnegie tried, and over the following century many wealthy – and not so wealthy! – American families have followed Carnegie’s example of “giving back” to the society that nurtured their success.

In other words, just as wealthy families deploy venture capital to support good ideas that might make money, wealthy families also deploy foundation capital to support good ideas that can’t. Consider, just as an example, the Harlem Children’s Zone, one of the most interesting, innovative and powerful anti-poverty programs in America since the demise of the Great Society.

HCZ is the brainchild of Geoffrey Canada, a brilliant and charismatic African-American who decided to “adopt” about 100 blocks in central Harlem and to aspire to nothing less than “breaking the cycle of generational poverty for … thousands of children and families.” But where was Canada going to get the millions of dollars he needed, given that government antipoverty programs had already distinguished themselves by their failure?

The answer, of course, was foundations. And, as often happens, Canada’s idea for HCZ resonated strongly with a guy who happened to have a lot of private capital and who had dedicated loads of it to a private foundation. The guy was Stan Druckenmiller, the legendary manager of hedge fund Duquesne Capital.(5) Druckenmiller continues to chair HCZ’s board and, as far as I know, continues to be its largest financial supporter.

Antipoverty programs may be moribund at the Federal and state level, but private capital is still hard at work on the problem. And thousands of foundations are hard at work on many other problems best addressed in a not-for-profit framework. Solutions to these problems improve American civil society in important and ongoing ways.

The aggregate activities of these foundations represent a huge competitive advantage for America – just ask societies around the world who are desperately trying to encourage the formation of foundations in their own countries. Alas, to paraphrase what I’ve said before, no private capital, no foundations; no foundations, no nonprofit innovation; no nonprofit innovation, total reliance on lumbering, fickle governments.

 

(1) And that merely scratches the surface. There are also tens of thousands of donor advised funds in the US, housed at community foundations and commercial operations like the Fidelity Charitable Gift Fund.

(2) Another good working definition, attributed to social critic Dwight McDonald, is “a large pile of money surrounded by sucking sounds.”

(3) The sales price was paid to Carnegie in the form of gold bonds. There were so many bonds that when the final payment was delivered, the Hudson Trust Company (in Hoboken, NJ) had to construct a special vault to hold them all.

(4) As Ike Leighty once put it, “Starting a family foundation is like catching a porcupine –first you throw a washtub over it and that gives you something to sit on while you figure out what to do next.”

(5) Druckenmiller was born in Pittsburgh – hence the name, Duquesne Capital – and started his career as an oil analyst at the old Pittsburgh National Bank.

Next up: American Exceptionalism: Building the Great University

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.