Inspired by my post about Four Peaks Brewing, I started doing some research on the three tier distribution system required for alcohol distribution in 49 US states, with Washington state being the exception. The system began with the 21st amendment to the United States Constitution, which repealed Prohibition. With the passage of the 21st amendment, the states were given control to regulate alcohol, and the three tier distribution system became the preferred way to do this. Now, if you are not familiar with the three tiers, they are the producer, the distributor, and the retailer. With this system, no one entity is allowed to have control over all three tiers.
The Associated Beer Distributers of Illinois gives a good summary of the goals for the three tier system, from the perspective of supporters of the system.
This system has four primary goals:
- To avoid the overly aggressive marketing and sales practices of the pre-Prohibition era;
- To generate tax revenues that can be collected efficiently from the beer distribution industry;
- To facilitate state and local control of alcoholic beverages; and
- To encourage moderate consumption (temperance).
When I read the reasons “To avoid overly aggressive marketing and sales practices of the pre-Prohibition era” and “to encourage temperance”, this did not pass the smell test, so I intuitively knew that if any of these claims had any truth to them, there was a reason for them. As in, if there was over consumption pre-Prohibition, why was there over consumption? Also, what were these aggressive marketing tactics? And, if these were really systemic problems, how would a three tier system prevent this? As for the state control and taxing authority, I think it is pretty clear why a state would want to enact such a system!
I will first address the claim regarding the aggressive marketing and sales tactics of the pre-Prohibition era.
This claim mostly comes from the fact that there were brewery owned saloons and tied-houses, meaning that a brewery made a deal with a retailer to promote the brewery’s beer or sell it exclusively. Now, looking at this claim with my economist hat on, I find it hard to believe that brewery owned saloons and tied-houses would be a problem, unless there were artificial barriers to entry. What I mean by this is that if a saloon only sells one brand of beer, what’s to stop another saloon from opening with the intent to sell another brand, or multiple brands? Also, if there aren’t any barriers to starting a brewery and selling your product, it’s hard for any one brewery to control a particular market for any meaningful length of time. For further refutation, Tom Woods explains the Misplaced Fear of Monopoly very well. During my research, I found Mark Thorton’s book, The Economics of Prohibition to be invaluable, as he confirmed my intuition that there were barriers to entry for saloons during the pre-Prohibition era. From page 54 of Thorton’s book:
Saloonkeepers in several states often found it difficult to pay the annual license fees. One method of financing these fees was to have a brewer pay the fee in return for exclusive selling rights.
These expensive licensing fees also contributed to saloons disregarding blue laws, which prohibited opening on Sundays, to make ends meet. In order to avoid prosecution, bribes were paid to police and politicians. Among these and other reasons, saloons and the alcohol industry in general, became associated with crime and corruption. He sums it up perfectly on page 55 when he states:
It should be noted, however, that high license fees, excise taxes, and other political requirements were responsible for this “overcompetition” and dishonest activity.
Now, on to the claim that the three tier distribution system is needed for temperance.
First of all, how does a proponent of the three tier system justify temperance as an outcome of the system? The main defense of the temperance claim is that by requiring the addition of a middleman (distributor), the price to the consumer is increased and that the higher price of the drink will curb consumption. A higher price would lead to some decrease in consumption for extremely price sensitive consumers, but it does not address the underlying reason of why overconsumption was a problem in the first place. Nor, does it justify artificially raising prices for consumers. Unfortunately, I haven’t been able to find any concrete data thus far concerning how much of a problem or lack of a problem alcohol abuse created in the pre-Prohibition error. One thought I did have regarding overconsumption is that it could have been explained by soldiers and others affected by the devastating effects of war and fighting, who would have been seen abusing alcohol as an escape. In fact, I found support of this on page 69 of Thorton’s book where he states:
Wars (Revolutionary, 1812, Civil, Spanish-American, and particularly World War I) were also shown to encourage the consumption of alcohol and narcotics and to play a major role in the establishment of prohibitions.
I also suspect that some of what was considered overconsumption was normal drinking habits of new immigrants coming from Europe. Their cultural affinity for alcohol would have been shocking to the puritan proponents of Prohibition. In fact, Mark Thorton points out how prohibitionists allied with anti-immigrant platforms on pages 45 and 46 when he discusses how the promotion of temperance was moving from voluntary means to coercive ones in the mid 1800’s:
The radical strategists were increasingly successful in establishing these interventionist measures. True temperance organizations such as the Washingtonians weakened while prohibitionists strengthened themselves politically through alliances with the abolitionist and anti-immigrant movements.
The interventionist measures that are discussed in the excerpt above were legal restrictions on alcohol as well as local government prohibitions. Note that the Washingtonians were a temperance organization that began as promoting voluntary means to temperance such as charity to drunkards and support, such as occurs today with Alcoholics Anonymous. In fact, the Washingtonians were opposed to coercive attempts at temperance, but were unfortunately co-opted by the interventionists as time went on.
I hope this post shines some light on the nefarious origins of the three tier distribution system. In the future, I plan to write about the effects of this system on the current beer industry. If you wish to read more about the origins of Prohibition itself, Mark Thorton’s Book is available from the following sites: