Lessons From The History Of Alcohol Control

Author's note: The following essay is intended for use as the final element of Part I. of A Comprehensive Public Health Strategy for Control of the Drug/Crime Epidemic.In this position, this article will form a bridge linking the preceding analysis of the drug/crime epidemic to the following specification of that epidemic's remedy.

Donald C. Smart
April 5, 1997

Alcohol as a Dangerous Drug Alcohol is a dangerous drug and a major public health menace in the United States and many other parts of the world. As for its health detriments, Holder, Lennox and Blose (1992) report studies showing that: U.S. drinkers use medical care at twice the rate of non-drinker members of the same age and gender cohorts; drinkers have shorter life expectancies and higher mortality rates; and alcohol consumption increases a person's chances of illness and early death from damaged liver, intestines, gastrological and endocrine systems, heart, nervous, and respiratory systems, the throat and esophagus, and from cancer. Still other studies show that alcohol compromises the immune system and a wide range of medicinal drugs. Beyond these hazards, drinkers suffer increased risk of accidental injury to themselves and others from stupor, distorted perception, impaired motor control and psychosis. The associated social costs are enormous.

Since alcohol is widely acknowledged to do more harm than all the illegal drugs combined, we might ask: why is it not illegal? For the answer, we must look at the politics of alcohol policy in the period of prohibition's repeal. By December of 1933, an alcohol industry engorged on the super-profits of prohibition, had managed to buy favorable portrayal of alcohol and the alcohol culture in the news and entertainment media of the period and to convince very large numbers of Americans that drinking was better than the combined merits of abstinence and obedience to the law. The drinkers were joined by those of the abstainers who had learned the first lesson of alcohol history, and, together with the industry and its beneficiaries, a coalition formed that decisively out- numbered the prohibitionists. That is why this dangerous drug is also legal (Kyvig, 1979).

The first lesson of alcohol history has been treated above: it is that prohibition of alcohol - society's reflex reaction to alcohol harm - instead of preventing alcohol harm, fertilized the infamous gangsterism of the 1920's with super-profits from the illegal traffic in bootlegged alcohol. The social, political and economic mechanisms that drove the social pathologies of the era of alcohol prohibition were very much the same as those that drive today's drug/crime epidemic.

At this writing, we are six decades into the post-prohibition era, a period with its own unique experience in the control of alcohol. Let us examine now some of the major aspects of the experience of this era with an eye out for lessons that may be applicable to our contemporary problem of controlling harm from the presently illegal drugs.

The State Monopoly System Several states of the United States and several foreign countries currently operate governmentally- owned monopolies (so-called "state monopolies") in the distribution of alcoholic beverages. The declared rationale for creating these monopolies was to control private enterprise in the distribution of alcohol and thereby reduce consumption.

There are considerable differences between the existing alcohol monopolies in their powers and scope of operations, but they all have this in common: private enterprise in competition with the state monopoly is prohibited, and criminal sanctions apply. Remarkably, where the state monopolies exist, the crime-generating effects we usually associate with prohibition range between non-existent and negligible. The reason for the low level of gangsterism in bootlegged alcohol is that these governmentally owned monopolies substantially supply existing market demand. In consequence, where the monopoly powers are used appropriately, there is little (if any) artificially- created scarcity to cause alcohol prices greatly to exceed real economic worth; there is little (or no) opportunity to reap super-profits; and there is little or no motive to gangsterism in alcohol commerce.

Sweden had one of the world's most successful alcohol control systems until January 1, 1995. On that date, the system was significantly altered as a result of an exchange of trade concessions with the European Community. It was the old system that gave Sweden its indices of alcohol use and related pathologies--indices that rank with the lowest in the industrial world (Romanus 1995, p. 38). Since the old system was responsible for the achievements of Swedish alcohol policy, it is the old system that is of interest here.

Under the old system, two state monopolies were employed. One, the so-called Systembolaget, had jurisdiction over retail sales and sales to restaurants (for diner consumption). Retail distribution of packaged beer, wine and distilled spirits was restricted to the state stores of the Systembolaget excepting only in remote locations with small populations. In such places, the Systembolaget supplied a local merchant whom it licensed to supply local drinkers. A second governmentally- created corporation called Vin & Sprit monopolized the importing of spirits, wine and strong beer, and the production and export of spirits. Advertising was legally prohibited. The Systembolaget used its face-to-face relations with alcohol consumers to promote prudence and moderation in consumption (Romanus, 1993).

State Monopoly and Licensing Systems in the United States While the Swedish monopolies have antecedents going back to the middle of the 19th century, the American alcohol monopolies are all creatures of our repeal era, and all were created without precedent in our own institutional history. When the 36th state ratified repeal in 1933, the states regained jurisdiction over alcohol policy within their own borders, and the states exercised their lately restored power by choosing variously between the then known three generic systems of alcohol control. Quixotically, three states chose to continue prohibition: Kansas, Mississippi, and Oklahoma. Mississippi persisted longest in that choice, holding out until 1966.1

Most of the others states created Alcohol Control Boards (ABC's) authorized to license private enterprises at one or more levels of the alcohol commerce ladder. Most U.S. citizens now live in states with some sort of licensing system.

As for the states that chose the third way, by Holder's 1993 account, seventeen states are still exercising some degree of monopoly control over alcohol. They were: Washington, Oregon, Idaho, Montana, Utah, South Dakota, Minnesota, Michigan, Ohio, Pennsylvania, Virginia, North Carolina, Maine, New Hampshire, Vermont, Alabama, and Mississippi.

The foregoing few paragraphs should dispel a common illusion regarding the history of alcohol- related gangsterism in America. Contrary to widely held belief, it was not only repeal and legalization that brought prohibition' s drug/crime epidemic to an end: it was also the introduction of the state monopolies with retained illegality of private commerce in alcoholthat turned back the tide of bootlegging and gangsterism. The capability of the state monopoly systems to dissipate the crime-generating propensity of prohibition is a neglected phenomenon of utmost importance. It is the repeated experience of this phenomenon, under widely varying circumstances, that validates belief that the drug/crime epidemic of our present time can be controlled with the aid of a state monopoly drug distribution system, again, while retaining the present illegality of private enterprise in drug supply activities.

John D. Rockefeller II and theOrigins of the U.S. Alcohol Monopolies The political process leading to creation of the American alcohol monopolies is especially interesting. A pivotal player in this process was John D. Rockefeller II (1874-1960). He was the son of the industrial titan who founded, among other things, the Standard Oil Company. The younger Rockefeller became a great capitalist in his own right, and, like his father, a generous philanthropist. He may be best known today as the builder of New York City's Rockefeller Center.

Rockefeller had been a lifelong abstainer and an early supporter of prohibition, but when he observed prohibition's failure to control alcohol and prohibition's propensity to generate gangsterism and corruption, he switched sides--with carefully staged public fanfare--to the cause of repeal. His dramatic change of direction in 1930 was widely credited, by observers on both sides of the issue, as the single most important influence leading the American people to the realization that prohibition was a failure, that it could not be made to succeed, and that it should be abandoned (Fosdick 1956, p. 257-258). But that is only the beginning of the story of Rockefeller's role in alcohol policy.

He went on to sponsor research on alcohol policy alternatives (Fosdick 1956, p. 259). For this purpose a large staff was assembled to collect detailed data and analysis on the world's entire range of alcohol control systems, their histories and their effectiveness. The research findings were then summarized in a book published in 1933 under the authorship of Rockefeller's principal investigators. This book evaluates the typical attributes of the licensing and state monopoly systems, and it provides a working plan for systems of the latter type, including design details the authors thought suitable to conditions in the United States. The book under discussion here is Fosdick and Scott's Toward Liquor Control,the first systematic tract for the state monopoly system in our national tradition.

To assure the success of this book, Rockefeller wrote its introduction, giving his unstinting endorsement to the author's findings and recommendations. Perhaps because of the public respect accorded its distinguished sponsor, as well as the merits of the arguments it raised, this book quickly attracted a publisher and went on to win recognition as a major contribution to the public debate on alcohol policy. Finally the book was sent to all of the state legislatures at the time when the latter were formulating policy to succeed prohibition. Inasmuch as this book put the state monopoly system on the policy agenda in America, it is safe to say that the state monopoly systems would not have been planted on American soil but for the initiative and leadership of John D. Rockefeller II.

It is interesting to reflect that, under Rockefeller's influence, the change from prohibition at the peak of its power, to prohibition's collapse and the dawn of the state monopoly era, took as little as three years. From that remarkable precedent we must infer that it is possible today that a single individual (or a small group) armed with great wealth, moral courage and a sense of social mission can similarly set in motion processes leading to rapid policy change and the sudden end of our country's present-day drug/crime epidemic.

One final note on the politics of policy change: until the party conventionsof 1932, both of the major national political parties supported prohibition. Only for the election of 1932 did the Democrats switch to an unambiguous position for repeal. Even then, both parties embraced powerful constituencies and leading advocates on both sides of the issue (Kyvig 1979, p. 158). It is typical of American politics that issues cut across party lines. It is typical of drug politics that there is no unifying interest (such as social or economic class, ethnicity, gender, regional, religious, or age differences) in the social impact of drugs, and there is consequently no basis for anticipating any particular future partisan alignment on future drug policy issues. At the same time, it can certainly be anticipated that the drug supply industry will continue to purchase political favors wherever and whenever it finds suitable recipients of its largess--regardless of party affiliation.

Why the State Monopolies? Now let us consider the reasons for preferring the state monopoly system to the licensing system. For that purpose, the following excerpts from Fosdick and Scott (with the original italics) will serve as a starting place.

The licensing system endeavors to establish...controls through negativerules, regulations, conditions and taxes, imposed from without,upon privateenterprise, which necessarily is conducted for personal profit.The state Authority plan endeavors to impose these controls through positive managementfrom within a publicenterprise conducted for the benefit of society.(p. 78-79)

Under a state monopoly system...no individual connected with the retail sale would gain one penny by reason of his sales, nor would his employment be imperiled if he failed to show good sales returns, as might be the case in private trade...the salaried employees waiting on the customers in the various state stores would be under strict supervision not only to see that there was no encouragement of the sale of liquor, but to make sure that no beverages were sold in violation of the letter and the spirit of the regulations. (p. 79)

Under the license system on the other hand, competing private dealers are under constant temptation to build up their sales and profits. The issuance of liquor licenses to private dealers presupposes the right to make a living by the sale of liquor. Since his livelihood is at stake, the private seller always has been, and always will be, interested in sales, and in nothing but sales. (p. 79-80)

It is...difficult to see how in the long run...advertising can be eliminated by state law under the license system...There are too many loopholes, too many indirect methods of advertising, too many national journals, and broadcasting stations. Under the Authority plan, the opportunity for control of advertising is far greater. Indeed it could be practically eliminated if the public interest so demanded. In any event, the authority could draft an advertising code and force its acceptance, either through refusal to buy from manufacturers who violated it or through a selective increase in the retail price of the products of an offender. (p. 80-81)

...inasmuch as the retail price of liquor is a central factor in regulating both legal and illegal consumption, the Authority can use its price-making power as one of its most effective instruments of control...It is not likely that a state liquor licensing board can exercise power to fix prices without running afoul of the strongest kind of opposition and interference from the private business interests involved. (p. 81-82).

In contrast...the Alcohol Control Authority could fix prices without the slightest opposition from private business interests because the Authority would own the liquor. Through price control it could, within limits, modify sales volume at will...It would even be possible to sell certain products at a price below what would show a profit, if this step were thought expedient as a measure for promoting temperance through a change in drinking tastes. The Authority would be equally concerned with defeating the bootlegger and with avoiding the stimulation of consumption which might follow too low a level of prices. The price of liquor is thus seen as a two- edged sword, but to avoid disaster the wielder of it must have exclusive possession of the hilt. (p. 83)

Promise and Performance: Two Control Systems Compared Alcohol control in the United States of the post-prohibition years has been notably unsuccessful. The best evidence for this is that year after year following repeal, and for decades at a time, both alcohol consumption and the indices of related pathologies rose steadily.2Since our predominant reliance in the post-prohibition period has been on the licensing system, that system has to take the lion's share of the blame. The impotence of the licensing agencies has lead to a sea-change in the public perception of the agencies' reason for being. As the years have gone by, with the alcohol supply industry steadily whittling away at the powers initially legislated to the licensing agencies, the public has gradually come to view the alcohol control boards as mere revenue collection devices devoid of any public health objective.

Although some licensing systems are more effective than others, systemic shortcomings appear to insure their long-run impotence. Inherently the system allows market demand to stimulate investment for profit in the alcohol supply industry; inherently, the pursuit of profit induces the industry to stimulate demand through product promotion and advertising; the system shelters the industry from responsibility for alcohol-associated harm; the system gives the supply industry abundant wealth to manipulate public opinion and purchase the gradual relaxation of regulatory constraints.

There is a lesson to be drawn from this systemic analysis. It is a lesson applicable to policy regarding the presently illegal drugs, and it is a lesson the advocates of "drug legalization with controls" should note with caution because it denies their claim that licensing of legalized drug commerce would provide acceptably low prevalence of drug use. On the contrary, the proper inference to be drawn is that, if applied to the illegal drugs, the same system with the same faults will produce the same result--public health disaster from increased drug use.

As for the state monopoly system, while it has generally outperformed the licensing system, it has not yet fully realized Fosdick and Scott's hopes for it. That is not the fault of their prescription. It is fair to say that their prescription has never been fully enacted. After all, Toward Liquor Control has never been the only influence on alcohol policy in the monopolies states. All along, the alcohol industry has also had its oar in the political water, as have the persuaded consumers of the industry's products. In consequence, both at their founding and subsequently, the various monopolies have been variously compromised.

The preceding paragraph is no justification for cynicism or fatalistic resignation regarding the fate of legislative proposals; nor is it grounds for condemning the political processes of our democracy. Our political system is not intended to produce perfect laws. What we want of law in a democracy is compromise weighted to the political influence of the sundry constituencies active in the politics of the contested issue--whatever the issue. In our democracy, the opportunity is always available to strike a new compromise: all we have to do is bring the votes to the political bargaining table.

Today much greater diversity exists between the monopolies than can be described here, but a few examples will suggest the range of variety. No state manufactures alcoholic beverages (as Sweden's and other foreign monopolies have done or continue to do); sale of distilled spirits for consumption off premises is almost always restricted to state stores, but the retail distribution of beer and wine is often by private enterprise retailers under a licensing system. Michigan's monopoly now functions only at the wholesale level, with all retailing "privatized." Utah allows only beer to be sold in grocery stores. On-premises consumption of hard liquor is typically restricted to licensed private enterprises, but in two states, such sales are restricted to municipally operated taverns. (Gruenewald and Janes, 1988). Further to becloud evaluation, the state monopoly system is not without examples of substantial perversion: for example, like an aggressive merchant in private enterprise, New Hampshire has come to operate its now highly profitable state monopoly as a revenue device. It even uses lower prices to increase sales to price-conscious drinkers in neighboring Massachusetts, where beverages are taxed (Holder 1993, p. 315).

So which is better? licensing, or the state monopoly system? The evidence from field observation at home is mixed. Some states with license systems have lower consumption rates than some of the (nominally) monopoly states. This has led some alcohol policy analysts to conclude that variations in the strictness of other aspects of the regulatory systems are more significant determinants of consumption than the generic system itself. Thus a study by Huddle, Fuchs, and Holder, over a twenty-five year time period, supports their conclusion that "the more restrictive states showed lower consumption than the less restrictive states," without regard for whether the state used a license or monopoly system. (Holder, 1987, p.413)

On the other hand, great successes abroad suggest that we in American have not yet wrung the monopoly system for all it can give. It remains generally true of the monopolies that the closer the institutional design is to the prescriptions of Fosdick and Scott, the lower the resulting rate of consumption.

Indications of Inherent Superiority That the state monopoly system is inherently more effective than the licensing system is hinted by studies of changes in alcohol consumption rates when states convert from monopoly systems to licensing systems. Several studies by highly expert researchers have been conducted in this problem area. Holder (1994) summarized the result of several other studies over a twenty-year period--all involving a partial or complete elimination of state monopoly control--in Idaho, Maine, Washington, Virginia, Canada, and New Zealand. Holder concluded that, although some studies showed different results, when correction was made for methodological errors, the cumulative evidence is that significant increases in consumption occurred in all cases where a state monopoly role was privatized.

A still later study shows just how significant these increases were: "...we found significant increases in wine sales after privatization...42 % in Alabama, 150% in Idaho, 137% in Maine, 75% in Montana and 15% in New Hampshire." The per annum increases in liters of pure ethanol consumed in the form of wine were "621,000 in Alabama, 432,000 in Idaho, 364,000 in Maine, 363,000 in Montana and 171,000 in New Hampshire," and the conclusion drawn--"The structure of the retail alcohol distribution system has a significant effect on alcohol sales." (Wagenaar and Holder, 1995)

Inherent Superiority of the State Monopoly System For the reasons identified by Fosdick and Scott and set out above, the state monopoly system appears inherently to be most powerful at reducing alcohol consumption. Economic theory explains this superiority at a higher level of generalization, and it explains as well the differences in the effectiveness of the sundry state monopolies. Through the lens of economic theory, the effectiveness of any control system is dependent upon the extent to which the control institution is empowered to interrupt the mutual stimulation between the supply and demand sides of the market.

As for the supply side stimulus to demand, under a state monopoly regime, advertising and promotion can be made illegal, as well as distribution by private entrepreneur. Without advertising and promotion, fewer young people are seduced into experimentation with alcohol, and fewer individuals consequently come to incorporate alcohol into their life-style. With a reduced pool of alcohol consumers, fewer people succumb to alcoholism and the associated pathologies.

In contrast, under the state licensing systems, it is difficult to constrain advertising (the supply industry's principal tool for stimulating demand) because alcohol is a legal commodity in private enterprise, and advertising that targets adults is protected as free speech. Under the licensing system, advertising and promotion can be constrained legally only to the extent that it can be demonstrated that children are targeted because, for children, alcohol is an illegal commodity. Returning to the higher theoretical level, the licensing system is inherently less powerful at reducing the supply side stimulus to demand.

As for the demand side stimulus to the supply industry, a state monopoly can be given powers that depress the rate of profit for businesses at the unmonopolized levels of the commercial ladder. The direct effects and positive feedback loops then operate as follows:

*Profit-seekers are discouraged from investing in production and distribution facilities,
*Advertising and promotion are constrained by reduced resources,
*Reduced financial resources are available for purchase of legislative favors and for
bribing public employees in the oversight functions,
*The number of people who identify their economic well-being with the alcohol
industry shrinks, and, in consequence, the political weight shifts further in favor of
the alcohol control forces,
*Fewer people use alcohol and get in trouble with it, and
*The health detriments and social costs associated with the use of alcohol are

State monopoly systems can also be designed to eliminate altogether the demand side stimulus to the supply industry. For this purpose, the supply industry functions of retailing, wholesaling, manufacture, import and export can all be relegated to a state monopoly, as Finland and Sweden have done. Monopolization of the entire industry renders moot the legal status of advertising. Whether advertising is legal or not, no one will go to the trouble and expense of advertising a product from the sale of which no profit can be gained. By the same token, without financial inducements from alcohol industrialists, the entertainment media would cease to go out of its way to portray alcohol favorably.

Monopoly systems empowered to employ economic measures of the sort above generally described can achieve their public health objective without stimulating black market commerce, and without reliance on criminal justice measures. Society can be spared enormous medical, social and material costs. Such systems also offer stability over time at minimal cost in political struggle.

What to Do with Net Income? To discourage demand, a tactic available to alcohol monopolies is to peg the retail price as high as possible without attracting bootleggers to enter the market. This tactic also tends to produce high revenue (as compared to the cost of operations), so state alcohol monopolies typically operate at a profit (Harrison and Laine, 1936). The profitability of the state monopolies raises an associated policy question--what to do with the surplus of income over cost? Fosdick and Scott endorsed what has become the dominant response to this question--to direct the surplus into the general fund, where it can be used to defray any of the competing costs of government. As already mentioned, this practice has the disadvantage that it creates a conflict of interest between revenue- generation and the public health purpose of alcohol control. The alcohol supply industry takes advantage of this conflict of interests; it mobilizes friendly constituencies to weaken the legislative shackles to allow more sales and increase governmental revenues. Needless to say, industry profits increase--the real objective.

Then increased profits become a stimulus to still further production and sales effort, and soon the alcohol industry is working still harder (and with increased resources) for still further erosion of state controls.

In contradiction to Fosdick and Scott, your author believes that, instead of directing the operating surplus to the general fund, the surplus should be dedicated to alcohol prevention measures and to remedying alcohol harm. (Prevention and remediation measures, reduce demand, and demand reduction reduces the stimulus to supply--a desirable feedback loop.) No disproportional allocation of resources can result from this dedication because, under this scheme, the size of the surplus will automatically wax and wane in proportion to the waxing and waning of alcohol use. In consequence, at least this one resource for the funding of prevention and remedial effort will vary automatically with the real size of the alcohol epidemic. As used here, "automatically" means "without need for further political struggle."

State Monopolies and Socialism Inasmuch as public ownership of the means of production is a tenet and objective of socialism, and inasmuch as American capitalists have typically been stalwart opponents of socialism, the reader may wonder how John D. Rockefeller II, an American capitalist par excellence,came to his advocacy of the state alcohol distribution system. The question is of more than historical interest if the answer can predict how our contemporary American capitalists might react to proposed use of the state monopoly system as an element of a comprehensive public health strategy for control of the drug/crime epidemic. The following excerpt from Rockefeller's introduction to Toward Liquor Controlprovides a good start toward the answer to this question.

...only as the profit motive is eliminated is there any hope of controlling the liquor traffic in the interest of a decent society. To approach the problem from any other angle is only to tinker with it and to ensure failure.

From this statement it is apparent that John D. Rockefeller II understood with crystal clarity the most important lessons from the history of effort to control alcohol, that:

  • The proper use of the profit motive is for stimulating production and distribution of socially beneficial goods and services.
  • Society does not need to tolerate private enterprise in commodities that corrupt the public health, and we certainly should not reward it.
  • The state monopoly system is the best way to suppress private enterprise in commodities for corruption of the public health.

The reader is left to form his/her own opinion as to whether today's capitalists and trustees of great wealth will take the same points.

An Epilogue An illusion that sustains prohibition (both of alcohol and the presently illegal drugs) is that the policy choice is between legalization and prohibition. On the strength of that illusion, most people put up with the all too evident faults of prohibition, believing that legalization would be worse. Obviously the advocates of legalization take the opposite view.

An unfortunate irony from the history of the repeal movement is that some health practitioners became advocates for the legalization of alcohol. Perhaps they had become so concerned with the social costs of prohibition's crime epidemic, that harm from alcohol became a distinctly lesser evil. Be that as it may, by belittling the hazards of alcohol, these health professionals helped set the stage, not only for repeal, but for both the social acceptance of alcohol and for our alcohol problems decades later.

With the introduction of the state monopoly system as a public policy option, belittlement of the alcohol danger lost its "lesser evil" justification, and belittlement of alcohol's dangers should have been abandoned. Consistent loyalty to public health now appears to demand choice of the state monopoly system as the best means to control the alcohol/crime epidemic. But to advocate the state monopoly system does imply that alcohol is a dangerous drug--potentially an embarrassing admission for one who has long belittled the alcohol danger as a lesser evil.

Some health professionals will inevitably confront the same problem in the drug policy controversy of today. If drugs are not really so dangerous, (as some advocates of legalization now say), then the proper remedy for our contemporary drug/crime epidemic is simply legalization, and there is no need of controls of any sort. On the other hand, if the illegal drugs are genuinely dangerous, then a control system is needed, and the choice of policy tools for that purpose should include a state monopoly system to suppress the mutual stimulation of drug supply and demand and abate the drug/crime epidemic.


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