When the responsibility for alcohol control was deferred to the states it was clear to those with a broader perspective that there would be problems, as delineated in the Fosdick and Scott text (1933). The first and foremost concern was economic control, an issue in the U.S. since the introduction of trusts and the concentration of eco- nomic power in large corporations that eventually led to the passing of the Sherman Antitrust Act (Congressional Record, 1890). In 1914, the Clayton Antitrust Act was passed by Congress with the intent to limit exclusive sales contracts, local price cut- ting to freeze out competitors, rebates, and interlocking directorates in corporations capitalized at $1 million or more in the same field of business and intercorporate stock holdings (Shenefield and Stelzer, 1996). Utilizing the 21st Amendment and guidance from federal laws such as the Webb-Kenyon Act and the Federal Alcohol Administration Act, states created systems to separate those who made alcohol from those who sold alcohol. The purpose was two-fold: (1) to clean up the system and (2) to rid it of its unsavory rum running association imposed by Prohibition. By creating separate licensed entities, a transparent and accountable system was cre- ated to weed out organized crime influences. For example, a wholesaler today must be licensed by both the federal and state governments and as part of this process undergoes a background check (Tax and Trade Bureau, 2007). The second part of this system allowed for the separate tiers to concentrate on their functions yet serve as regulatory pressure points on a completely free market. If applying regulatory pressure to a tier would help a state reach its proper balance for regulation, it was considered. Taxes, auditing of warehouses, and outlet limits are among the types of laws that impact the three tiers.
The framework for the post-Prohibition control of alcohol consumption began with the repeal of the 18th amendment in 1933. Ironically, antitrust action sharply
Why We Control Alcohol the Way We Do n declined during the Prohibition years of the 1920s. Soon thereafter President Roos- evelt passed the Robinson-Patman Act in 1936, which forbade anyone engaged in interstate commerce to discriminate in price to different purchasers of the same commodity if the effect would be to lessen competition or to create a monopoly.
Sometimes called the Anti-Chain Store Act, it was directed at protecting indepen- dent retailers and local “mom and pop” outlets from chain store competition, but was also supported by wholesalers eager to prevent large chain stores from buying directly from the manufacturers for lower prices (Macavoy, 1999). The same issues are being argued today in the federal courts with attempts by the big box retailer, Costco, as stated in its 2004 court filing, “Plaintiff Costco Corporation, brings this action to promote competition in the sale of wine and beer in the State of Wash- ington. Costco seeks to create lower prices and greater choices for Washington con- sumers and reform an inefficient and unlawful system that permits distributors to benefit at the expense of consumers and certain wineries and brewers.” Washington state operates a monopoly for distributing spirits. Costco’s suit is but one example of the battle between large national chain stores and the interests of local retailers and wholesalers.
The present regulatory scheme in some states requires a minimum markup price for wholesale and retail tiers. The intention here is not to guarantee a profit to wholesale and retailers at the expense of the consumer, but to maintain alcohol at a certain price level so that it cannot become too cheap and therefore easily acces- sible. A legitimate public policy is currently under consideration in England about the lack of price controls and sale of alcohol as a loss leader. Many blame these “race to the bottom” pricing points for an increase in alcohol-related harm in the United Kingdom (Steele, 2007). The same theory is used to justify excise taxes (Babor et al., 2003; Fosdick and Scott, 1933). Excise taxes are often harder to raise or adjust for inflation because of various procedural obstacles and a strong antitax sentiment across the United States.
Deregulators looking at this relationship through a lens of pure economic theory miss the Fosdick and Scott (1933) proposition of intentional fractionaliza- tion using a middle tier as the monopoly. Most states have laws that attempt to thwart the vertical relationship between supplier and wholesaler which, if applied and enforced, would continue to limit the ability to become vertical and cartelized (Distilled Spirits Council, 2004). State laws that may appear to make no sense in an ordinary economic model, minimum markup, brand representation, exclusive territory, tied house and other trade issues such as prohibitions on giving a retailer something of value are easily understood within the context of what was intended in 1933, and now needs to be analyzed from a 21st amendment perspective instead of an economic one (Jurkiewicz and Painter, 2004).
The second ongoing concern in alcohol control is whether the three main types of alcoholic beverages, beer, wines, and spirits, should be treated differently under the law. “A rational approach to the problem of liquor control requires an about-face and a new viewpoint. We should start by inquiring what concentration of alcohol
makes a beverage intoxicating in fact to an ordinary man. When the alcoholic con- tent is below that point, a drink should be subject to little, if any restraint upon its use. The sale of stronger drinks should be regulated under a program which, so far as is practible [sic], discourages consumption with increasing strictness as the alco- holic content increases” (Fosdick and Scott, 1933). This was the basis for the next 70+ years of attempts by law and public policy to control the negative outcomes involved with the consumption of alcohol by separating it into two categories: light wines and beer versus spirits. Today’s research shows increasing the alcohol content of a beverage increased consumption, while lowering content decreases consump- tion. Research has further concluded that lowering the drinking age results in more alcohol-related accidents, while mandatory server and retail training results in a significantly reduced number of crashes. Increased alcohol consumption per indi- vidual is concomitant with the expansion of retail hours while a reduction in hours significantly reduces consumption. School- and college-based alcohol education has also been found to reduce consumption although the number of studies in this area is minimal. Risk labels on alcohol bottles have had no discernible impact on consumption (Edwards, 1997).
The third ongoing issue regarding alcohol control, again unresolved since 1933, is social control by limiting access, maybe better described as the right to offer or not offer alcoholic beverages in a community at all. The traditional economic theory of federalism posits that more heterogeneous preferences result in more decentralized policy making (Oates, 1972; Strumpf and Oberholzer-Gee, 1999). This suggests that a state will select local option or decentralization when citizens on both sides of the legalization issue have intense preferences. In states that implement the local option, one can observe how characteristics such as demographics and religious affiliation influence the probability that a county’s residents will choose to legal- ize liquor (Strumpf and Oberholzer-Gee, 1999). The suggested process of utilizing the state legislative process instead of the federal congressional process allows the preference of the community that has to deal with the negative outcomes of alco- holic beverage use, whether agreeable or in conflict with the economic model, to be guaranteed. Utah and its citizens have different laws from Las Vegas. People within different parts of Texas have completely different views on the propriety of alcohol as do most other parts of the United States. This is an aspect of social control.
One of the goals in this retrospective of Toward Liquor Control is to determine whether the models that were decided upon while the memories of the failure of Prohibition were fresh have in any way succeeded in controlling the unintended consequences of the legal manufacture, distribution, sale, and consumption of alcohol, primarily through the interjection of a reverse economic model originally intended to give the middle tier the monopoly of economic control. As authors in the original text point out, in an ever-expanding universe, the natural trend of the economic model is to move toward a vertically integrated model. The solu- tion was to break that model for control purposes by what was called “two main
Why We Control Alcohol the Way We Do n classifications of government control: the license method and the public monopoly method” (Fosdick and Scott 1933, Chapters 4 and 5).
This new system in the license model makes the private wholesaler a semi- monopoly and retains the community’s rights to determine access. The state control model engages the government with the responsibility of limiting access of hard liquor and spirits by becoming the monopoly while leaving beer and sometimes wine to private enterprise. It also maintains the community’s right to determine access. Both systems, through local options and fair trade legislation attempt to separate the first and third tiers from becoming “tied.” Louisiana wholesalers today argue the need to maintain the present controls on tied houses or the consumer will have very little brand choice when shopping. “Normal economics relationships tend to draw to the vertical with large chain retailers and barrooms wanting to offer a few brands at cheaper prices. The consumer is a fourth tier which should have the right to brand choice in the market place” (Brown, 2005).
Fosdick and Scott (1933) understood the unique opportunity the United States had in the wake of Prohibition’s repeal to create a valid system of control through new theories and laws. “We have come now to the situation existing in those states in which, by repeal of the 18th Amendment, the slate has been wiped clean for a new experiment in liquor control” (p. 28).