A Short History of the Nonprofit Sector
Excerpted from "Facts & Fallacies", a CAN publicationThe nonprofit sector today is bigger, more diverse, more organized and more controversial than ever. Its leaders are more professional, more confident, more involved in public policy and more assertive than in previous decades. Nonprofits have always been part of the American commercial market-driven economy, but today they are more commercial than ever before.
Growth of the nonprofit sector has not come easy. The civil rights movement, President Johnson's Great Society, President Nixon's New Federalism, and now devolution have greatly shaped how the nonprofit sector looks today. Our growth may have been inevitable. But it might not be permanent.
Four-Hundredth Birthday
The year 1601 marks the passage of the Statute of Charitable Uses, in which the British government outlined for what purposes private monies — that is, monies not being channeled through the government via taxation — could be used for the public good. Until that time, it was rare to direct money, upon death, to any other purpose than the benefit of one's heirs.
To this day, the statute echoes in current United States laws that define the boundaries of the nonprofit sector: that is, in the Internal Revenue Code, which details 21 different types of nonprofit organizations. But the nonprofit sector we know today is the result of far more than a single statute passed in a single year. If the Statute of Charitable Uses is the nonprofit sector's legal forerunner, then the British Charter of Rights (1688) and the US Bill of Rights (1791) are its philosophical forerunners, promulgating the freedoms that paved the way for the nonprofit sector.
Freedom of religion
The search for religious freedom is an oft-cited catalyst for the birth of the United States. Soon to follow religious freedom was the principle of separation between church and state. "The First Amendment," claims Michael O'Neill, former director of the Institute for Nonprofit Organization Management, University of San Francisco, "excludes from government control a large and powerful area of organizational activity because of its intrinsic closeness to the human spirit."
Religious convictions have long been a springboard for nonprofit activities. The religious community has also had a deep impact on education, health care, human services, arts and advocacy. Religious organizations have driven conversations about issues like the teaching of evolution, institutionalized racism, environmental degradation and nuclear disarmament. Religious freedom has prompted the creation of a vast network of Catholic and other faith-based schools, hospitals and human services groups.2 The religious resurgence of the mid-twentieth century spawned the civil rights movement, which was grounded in African-American churches, as well as the fundamentalist Christian movement. Even today, faith-based organizations are increasingly recognized as key providers of services, especially in the wake of welfare reform.
Freedom of expression, assembly and petitioning government
The work of the nonprofit sector does not please everyone. We promote diversity, freedom of expression and the rights of individuals to form associations. We reflect popular forces that are not easily reversed. We have at times served the wealthy and we also serve the poor, people of color, women and gay people. During the civil rights movement, nonprofits persuaded federal courts to end a practice that denied many people the right to form nonprofits, hence the First Amendment right to assembly, petition, publish and act on one's beliefs became more universally applied.
Concerned about more than religious freedom, America's young nonprofit sector also began to cast an ever-wider net over social issues including the anti-slavery movement, women's rights, workers' rights and environmental protection. Nonprofit activities to preserve and promote freedom of expression branched into every aspect of our lives. Educational and arts and culture organizations continue to be places of hot controversy over how much freedom of expression should be allowed. And with nonprofits committed to such varied principles as the right to life, the right to choice, the right to bear arms and gun control, we are a very diverse sector.
While these freedoms have helped to define and nurture the nonprofit sector, the sector has, in return, helped to define and nurture those same freedoms. It was a nonprofit organization that created the country's first women's college, Mount Holyoke Seminary (now Mount Holyoke College), in 1837. A New Orleans nonprofit girls' school was racially integrated as early as 1727. It was a nonprofit that forged the first mental health care model to reject imprisonment and support compassionate, one-on-one counseling. Early priests in the western territories fought against the enslavement and other cruel treatment of Native Americans.
Nonprofit universities like Johns Hopkins and MIT pioneered educational models that were forerunners to the research, science and technological methods we take for granted today.
Charitable Giving
The year 1913 brought Americans the income tax, and in 1917 Congress passed a bill that allowed people to take an income tax deduction for gifts to charity. There was not much impact at first because Americans did not have much income. But after World War II, US wages increased dramatically and suddenly millions were paying income taxes — and beginning to take advantage of the charitable deduction write-off. Today, 83 percent of Americans donate to charities.
After World War II, nonprofits began to contract with the federal government for scientific, defense-related and medical research. In the late 1960s, federal money became as important as philanthropy. President Lyndon Johnson's Great Society fundamentally altered the size, scope and funding of nonprofits. Government funding began to rival charitable donations. By the late 1970s, government funding was larger than private giving.
In 1960, nonprofits comprised just three percent of the economy — up from one percent 150 years earlier. Forty years later, nonprofits made up nearly nine percent of the economy. Half of this growth is due to federal spending for nonprofit services. Now, reduced government funding challenges nonprofits' ability to provide services.
Fueled by economic growth in the 1950s and 1960s, nonprofits began to use professional fundraisers, and the National Society of Fundraising Executives (NSFRE), now called the Association of Fundraising Professionals, was founded. The boom in fundraising led to abuses. In 1950, New York broke ground by regulating professional fundraisers through requirements to register and report on their activities annually. By 1964, more than two dozen states had followed suit.
As private giving grew, so did corporate giving. The courts and Congress widened corporate support of nonprofits to the $9 billion it is today. High income and estate taxes of the 1940s and 1950s led to the increasing establishment of foundations. Again, abuses led to the overhaul of nonprofit tax laws with the Tax Reform Act of1969, which requires a minimum distribution of assets and payment of an annual excise tax.
Creating a Sector
Alexis de Tocqueville, the most famous observer of the early American nonprofits, noted that "Americans of all ages, all stations in life, and all types of disposition are forever forming associations..." Associations are necessary, he argued, for the stability of a democracy in which all citizens are equally independent and cannot rely on a powerful central government to dictate values or dispense charity. "He further noted that just as an energetic business community is necessary to keep government out of commerce, so vigorous 'intellectual and moral associations' are necessary to prevent government domination of 'opinions and sentiments.'"
In the 1970s, the Filer Commission helped to create the first body of information about the American nonprofit sector. Grantmakers and grantseekers also realized the value of partnership. And for the first time, nonprofit leaders began to think of themselves as a sector. Out of the Filer Commission came a new national organization called the Independent Sector. New academic centers on nonprofit studies, degree programs and management assistance centers popped up around the country.
Defining the Debate
Nonprofits' bold moves and models were not forged without tension. The sector can be seen to exist at the midpoint between church, state and business; between the public and private spheres; and between the individual and the collective. Alternately, nonprofits can be seen to embrace all these seemingly contradictory elements. Consider that:
• Nonprofits are major advancers of individual rights, but they frequently act on a democratic, grassroots level.
• There is often tension between the interests of people served by nonprofits and the interests of the public at large.
• Nonprofits are privately run but, to a large degree, publicly funded. Even private citizens and corporations get a public benefit — a tax deduction — when they make a charitable contribution.
• Though we think of them as private institutions, most nonprofits are considered public benefit corporations and must demonstrate that they advance the public good.
The nonprofit sector is an evolving mix of broad historic trends that embrace a range of ideology, function and form. Though ever-changing through its 400 years, nonprofit organizations are more important now to the well-being of our citizens and this state than ever before in its history.