Philanthropy and Education / Philanthropy and Historical Research

A “thoroughly satisfactory and permanent remedy”: the Twentieth Century Invention of the American University Endowment

Editors’ Note: Swelling college and university endowments have attracted increased scrutiny and criticism; the recently released House GOP tax plan even included a tax on the investment income of college and university endowments with assets of $100,000 or more per full-time student. In this post, Bruce Kimball outlines the origin of such large university endowments. It is adapted from  Bruce A. Kimball and Benjamin A. Johnson, “The Inception of the Meaning and Significance of Endowment in American Higher Education, 1890-1930,” Teachers College Record 114, no. 10 (2012): 1-32.


The term “endowment” today denotes funds that are “accepted subject to a requirement that the principal be maintained intact and invested to create a source of income.”[1] And endowment size has become one of the most prominent benchmarks for comparing colleges and universities, as shown by the steady stream of lists and rankings of endowments published in popular, professional, and academic media. When and how did this meaning and significance of endowment arise?

It is well known that colleges and universities have long held endowments, even extending back to the middle ages, if not to antiquity. In America, the oldest endowments—as well as the longest investment record—belong to Harvard College, which is the oldest corporation in the United States. One might therefore assume that endowment has always played a significant role in American higher education. Yet, its fundamental importance, the emphasis upon increasing it, and even its current meaning originated between 1890 and 1930 due to specific historical developments.

One development was simply economic growth. Prior to 1865, the economy of the United States did not generate enough surplus wealth to support large-scale philanthropy, and most gifts to higher education were made for current use. Consequently, few treatises devoted to endowments in higher education appeared before the Civil War, and those circulating in the United States after the war were generally written by British authors. Then, between 1870 and 1930, the economy of the United States grew immensely, producing an unprecedented number of millionaires and multi-millionaires.

The behavior and ethics of such men as Ezra Cornell, Benjamin Duke, Leland Stanford, Andrew Carnegie, and John D. Rockefeller have been much debated. But they clearly did contribute to two historical developments: philanthropy expanded enormously, and much of it flowed into higher education. Between 1870 and 1900 the aggregate endowment in higher education grew about tenfold to some $195,000,000. The avalanche of investing in higher education continued over the next three decades. In 1926, the General Education Board (GEB), founded by Rockefeller, estimated that endowments in higher education had quadrupled since 1900.

These unprecedented gifts were welcomed by American colleges and universities with few reservations. In Britain, the “dead hand” of donors, who endowed charities with tight restrictions, had tied up the capital of such charities, and this prompted reforms to the policies and legal rules governing endowments during the mid-nineteenth century. But such dead hand restrictions did not become a significant factor in the United States, largely because endowments were relatively small until the 1870s. At that point, the legal doctrine of cy près began to emerge, allowing courts to modify outmoded or unduly narrow restrictions.

Thus, early in the twentieth century, endowments in higher education grew impressively. In 1920, eight private universities had the largest endowments in the nation: Harvard ($44,569,000), Columbia ($39,602,000), Stanford ($33,260,000), Chicago ($28,364,000), Yale ($24,049,000), Cornell ($16,001,000), Princeton ($10,313,000), and Johns Hopkins ($9,135,000).

Today, it might appear natural that Harvard headed the list. But that rank was not customary for Harvard during this period. At points in the 1870s, Johns Hopkins and Cornell seemed to have the largest endowments. In the 1890s, Stanford University apparently did. Between 1875 and 1920, Columbia most often had the biggest endowment. In 1920 Harvard for the first time attained the lead that it would not relinquish.

Harvard’s rank is significant not only for that university, but also for the emergence of the meaning and significance of endowment in general. Each of the other seven wealthiest universities received at least one large gift dwarfing any that came to Harvard prior to 1930. Harvard established its lead in financial capital not by banking a few enormous gifts, but by pursuing a novel strategy.

All the presidents of the wealthiest universities took for granted that their institutions were engaged in a Darwinian competition for “survival of the fittest,” as President William R. Harper of the University of Chicago observed. These presidents also recognized that the outcome of their institutional competition depended on adequate financial resources.

But Harvard President Charles W. Eliot (1869-1909) was the first university president to see that the outcome would be determined not simply by spending gifts from major donors. Rather, Eliot realized that a university must build its overall financial resources. More precisely, he maintained that a university must focus its financial policies on accumulating permanent invested funds that produce income. Such endowment would provide the greatest advantage in the competition for academic achievement, influence, and status. In addition, “further endowment is the only thoroughly satisfactory and permanent remedy” for any problems that the university may face in the future, he wrote in his annual report for 1904-05.

Eliot’s devotion to increasing endowment was unique among presidents of the wealthiest universities during his tenure, which ended in 1909. Then, in the 1910s, the GEB embraced a mission of increasing endowments—and the appreciation for endowment—at colleges and universities. In fact, the GEB treated the best endowed institutions not as exceptional, but as normative for all of higher education. In 1915, the GEB announced the goal that endowment income should provide between 40 and 60 percent of the annual revenue of every “efficient college.”  Since Harvard’s endowment income provided 50 percent of its annual revenue at that time, the Board was envisioning that each college and university in the country should be as well-endowed as Harvard!

This emerging emphasis on endowment naturally entailed clarifying and refining the term’s meaning.

In the decades after the Civil War, the term “endowment” was used in various ways in the United States. College and university presidents and treasurers sometimes employed the word broadly to include all buildings, equipment, and investments, all of which they also called the institution’s “property.” Sometimes, presidents and treasurers narrowly employed “endowment” to denote only investments, which they more often called “productive funds,” “invested funds,” “productive capital,” “working capital,” and, increasingly in the 1880s and 1890s, “permanent funds.” The reports of the U.S. Commissioner of Education rarely used “endowment” at all, and alternately referred to investments as “productive funds,” “permanent funds” or “permanent productive funds.”

The terminology was still highly variable in the 1910s when the GEB launched its effort to increase endowments in higher education. When planning this effort, the GEB discovered that the financial reports of most colleges and universities were incomplete, unreliable, and irregular. Of particular concern to the GEB in 1915 was that “all sorts of property were being reported as ‘endowment,’ the word being so freely and loosely used by colleges…that published statistics were valueless.”

In 1920 the GEB hired Trevor Arnett, the chief accountant of the University of Chicago, to address these problems. In 1922 Arnett published College and University Finance, which became the leading authority on the subject, through the auspices of the GEB. Arnett asserted that, “unless the term ‘endowment’ is properly understood by the trustees and officers, the financial policy of an endowed college may go seriously astray.”

Arnett also wrote that “the term ‘endowment’ is used in its correct sense” in his book. That “correct” meaning focused on two cardinal characteristics underlying the variations and ambiguities in use. First was the function of the assets, as conveyed by the term “productive funds.” In order to be considered part of endowment, an asset must produce, and not consume, income. For example, neither unproductive real estate nor dormitories were endowment. Second was the duration of the asset, as conveyed by the term “permanent funds.” Endowment should “last forever” and remain “inviolate.” The principal of endowment “is sacred and should not be touched or encroached upon for any object whatsoever; its income alone is available,” preached Arnett.

Anticipated by the nineteenth-century terminology, Arnett’s “correct” meaning of “endowment” incorporated the two cardinal characteristics of productivity and permanence. In 1922, the GEB firmly adopted “the definition of endowment…namely: a fund which shall be maintained inviolate, the income of which shall alone be used.” That meaning then rapidly proliferated during the 1920s. By the end of the twentieth century, the usage of the terms “productive funds,” “permanent funds,” and “endowment” had completely reversed from the early 1800s. The former two had fallen out of use, while the term “endowment” predominated. The decade of the 1920s was the period in which the usage of these terms shifted.

The significance of endowment for colleges and universities followed the same path. The new understanding and appreciation of endowment arising between 1890 and 1930 gave a competitive edge to those colleges and universities that first realized the significance of financial capital and began to focus upon increasing it. Over the course of the twentieth century, the stratification of institutions in higher education increasingly corresponded to the size of their endowments.

A significant step on this path occurred in the late 1960s. With the support of the Ford Foundation, the financial officers of a few colleges and universities conducted several studies of the management of endowments in higher education. These studies prompted a number of accounting and legal changes that had three important effects.

First, college and university trustees, who have fiduciary responsibility for endowments, were permitted, essentially, to delegate that responsibility by hiring investment firms. Second, colleges and universities were allowed to treat the capital appreciation of investments as part of the annual income of endowments. Third, as a result of those two changes, the investment strategy of endowments became much more aggressive. Heavy investment in common stocks and much riskier assets was now possible, and this strategy permitted much bigger returns in a large and long-term portfolio.

A few data points signal this watershed. In 1970, Harvard University, along with other universities, changed the accounting basis of its portfolio from “book value” to “market value,” reflecting the shift to incorporate capital appreciation. Also in 1970, the Chronicle of Higher Education issued its first annual list of endowments of colleges and universities, which the National Association of College and University Business Officers then began to compile in 1974 and issue each year.

These three developments underlie the astronomical gains (and losses) in higher education endowments since 1970. It was in the late 1980s and 1990s that the long bull stock market dramatically increased the value of endowments. In the early 2000s critics began to call on colleges and universities to spend down their endowments and reduce tuition. Such criticism abated after the Great Recession of 2008-2009. But the bull market during the 2010s has once more led to targeting endowments, as in the latest proposals to tax their income.

But a longer—perhaps truly conservative—view advises caution. Colleges and universities gradually came to realize the importance of endowments a little more than a century ago. As President Eliot wrote in his published annual reports, endowments enhance the autonomy, stability, and flexibility of colleges and universities in long-term financial planning. The other major sources of revenue—tuition, grants, or gifts for current expenses—are subject to whim, political partisanship, and market forces. Endowment enhances the self-determination and financial stability of a college or university and provides it with the capacity to pursue opportunities and discretionary goals.

– Bruce A. Kimball

Bruce Kimball is a professor in the Philosophy & History of Education Program at Ohio State University and a former Guggenheim Fellow. He and co-author Daniel R. Coquillette have been awarded the 2017 Peter Dobkin Hall History of Philanthropy Prize for their book On the Battlefield of Merit: Harvard Law School, the First Century (2015).

[1] As defined in Philanthropy in America: A Comprehensive Historical Encyclopedia (2004).

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