The Blueprint for a Modern Alcohol Regulatory System

A system designed to address an early 20th century problem can't be effective in the 21st century.

As the anticipation of Prohibition’s end stirred policymakers and thinkers to consider what priorities ought to guide the creation of a new alcohol regulatory system, there existed a substantial contingent that believed the “Saloon” ought to be outlawed and took measures to create such conditions. This movement in states and even at the federal level to ban the reinstitution of drinking parlors was motivated by the recognition that in the years leading up to the adoption of the 18th Amendment, Saloon culture, the control of saloons by brewing and distillery concerns, and the outrageous amount of overconsumption that occurred in the saloons that seemed to occupy every corner of urban areas.

In the end, no such ban was put in place.

However, the stark differences between ideas surrounding alcohol control that animated thinkers in the early 20th century and those that guide our thinking on alcohol issues today, nearly 100 years later, are epitomized by the fact that no one today would even entertain the idea that bars, saloons, or taverns ought to be outlawed.

A lot has changed between the time when our current alcohol regulatory system was invented and today. The myriad social, cultural, economic, and technological differences between the experience and concerns of citizens and alcohol policymakers in 1933 and those in 2022 can’t be exaggerated. The gulf is wide.

It’s that gulf and the difference in motivations and concerns between yesterday and today that has created the obvious dissatisfaction with an antiquated and inefficient regulatory system among members of the alcohol trade today that requires a re-thinking and reformation in alcohol regulation. The obvious concern is any rethinking and rebuilding of an American alcohol regulatory system must reflect a contemporary reading of American culture and American economic conditions rather than those that reflect a time, more than a century ago, that no longer exist in America.

WHAT WAS IS NO LONGER
It’s worth looking at the cultural and regulatory milieu in which lawmakers and policy professionals approached the re-regulation of alcohol at the end of Prohibition. It’s true that an important concern of alcohol regulators at the end of Prohibition was excising the criminal element from the alcohol trade that flourished during Prohibition. However, the concern of criminality was not the most important.

First and foremost on the minds of post-Prohibition policymakers was preventing a return of the immoderate and dangerous consumption of alcohol that characterized much of American society leading up to Prohibition. Most of the blame for the cause of the problem drinking was laid at the feet of the “Tied House”.

Tied Houses referred to saloons and taverns that sold one brewer’s or one distiller’s product to the exclusion of others in return for compensation, investment, or other forms of inducement by the producer. However, receipt of those investments, gifts, and payments came with clear demands that Saloons would push and sell enormous amounts of the producers’ beers or spirits. This in turn led to sales and promotional efforts at Saloons that encouraged heavy and dangerous levels of consumption that caused significant problems and damage to individuals, families, and communities.

In response to these conditions, policymakers adopted the Three-Tier System of alcohol distribution and various passed various anti-Tied House laws in preparation for re-regulating alcohol after Repeal.

No system, including the Tied House System, develops or is sustained in a vacuum and it’s worth looking at the social, cultural, and economic conditions that existed from the end of the 19th century to the beginning years of the 20th century when the Tied House was in its heyday.

First, around the turn of the 20th century, America’s Urban areas were awash in European immigrants, most of them poor. Also in the first decades of the 20th century, we saw the beginning of a substantial migration of Blacks from the South to the North. Jon Grinspan, curator of political history at the Smithsonian National Museum of American History observes:

“Then there are local immigrants within the country who are moving around, who have no kind of ties. They’re not connected to family, cultural institutions, churches [and] synagogues. But what they have is a saloon around the corner….There are all these roles the saloon is playing in the life of poor, working-class Americans that no other institutions are stepping up to play”

In fact, for recent and even longstanding immigrants, the saloon was the place one went to discover available jobs, get the news, support and join political parties, push for unionization, gather with friends, eat, and, of course, to drink—often copious amounts. The saloon served as the community gathering place.

What did not exist at the turn of the 20th Century was the automobile, let alone easy cross-country automobile travel. There was no cross-country air travel. There was usually no electricity or air conditioning. There was no television, little in the way of radio broadcasts, no Internet, no streaming services, no movie theaters, no access to every live sporting event in the world, no FaceTime or Zooming, few inexpensive books and no email.

Not to put too fine a point on it, but the similarity between the Tied House Era, which post Prohibition lawmakers were focused upon in designing a new alcohol regulatory system, and today are nearly non-existent.

But more importantly is the point that the social, cultural, economic, and technological conditions in which the Tied House arose in the United States do not exist today and it is highly improbably that the Tied House could exist today. And yet, our current regulatory system is based on the notion that we must prevent the reoccurrence of the Tied House and the immoderate consumption it led to—over a century ago.

Many of the alcohol laws designed in the 1930s remain in place today, serving little purpose while attempting to prevent circumstances that existed a century ago that likely could not under any circumstances return today. They are not unlike the federal law put in place in the 1930s that barred interstate delivery by truck drivers under the age of 21. The current alcohol laws in many cases simply no longer make sense.

IMAGINING AND IMPLEMENTING AN ALCOHOL REGULATORY SYSTEM FOR TODAY AND TOMORROW
The question, then isn’t whether the American alcohol regulatory system should be reimagined and reformed, but rather how?

In Toward Liquor Control, the most influential treatise used in the formation of a post-Prohibition, authors Raymond Fosdick and Albert Scott identified a guiding principle of alcohol regulation that is equally compelling today as was in 1933:

““In the end intelligent lawmaking rests on the knowledge or estimate of what will be obeyed. Our traditional belief in the efficacy of law as a means of social control resulted in hundreds of liquor statutes which were unenforced and largely unenforceable, either because they did not represent public opinion or because the public opinion they did represent was not sufficiently preponderant in the community.”

Put another way, lawmakers can’t expect adherence to the law if the law in question doesn’t have substantial support. The consequences of not adhering to this principle are on full display today when consumers, producers, and retailers are found to be engaging in interstate commerce and alcohol shipments in violation of state laws. It’s clear that today restrictions on interstate shipment of alcohol products simply have no support and are often ignored.

A reformed alcohol regulatory system must avoid putting into place laws that have little support among the trade and particularly among today’s consumers.

On the other hand certain principles and concerns that animated 1930s policymakers and Americans remain substantially important and supported today, specifically the desire to protect against the negative health and safety effects of overconsumption and immoderate use of alcohol. Any reformed alcohol regulatory system must recognize the potential negative outcomes of alcohol consumption and must protect against industry activities that promote overconsumption.

Any redesign of America’s alcohol regulations must acknowledge and take into account the unfathomable increase in the number of producers from what existed in the post Prohibition moment and the need to provide them with a variety of paths to market. Put bluntly, any reform of the alcohol regulatory system must discard the state-mandated use of the wholesaler and provide an invitation to producers to sell direct, self distribute, as well as engage wholesalers on a contract basis.

It should be noted that the original impetus for the state-mandated use of a wholesaler in the form of a “three-tier system” was to provide protection against a resurgence of tied houses after Repeal. But as has become abundantly clear with innovations in a number of states including California and Washington, the demise of the requirement that producers sell only to wholesalers and retailers buy only from wholesalers has not led to a return of the tied house or the overconsumption many still argue will result if the three-tier system is discarded. There simply exists no justification today for continued reliance on the state-mandated use of a wholesaler for producers to bring products to market and retailers to fill their shelves.

Under an alcohol regulatory system that takes into account a modern understanding of market forces, the “Franchise Law” also needs to go away. These laws that bind producers to wholesalers either for eternity or until the producer can payoff the wholesaler, are universally scorned for the imbalance of power they provide to wholesalers. The number of other industries that incorporate state-enforced franchise arrangements can be counted on one hand. There is no reason why wholesalers can’t protect themselves and the effort and investment they put into building producer brands through the use of standard contract law.

The final, and perhaps most important, consideration in reforming the American alcohol regulatory system is the consumer. At the end of Prohibition, it was, ostensibly, the well-being of the consumer that animated lawmakers and led to the institution of tied house laws, the three-tier system as well as numerous other provisions that acted to restrict access to alcohol. Over the past 30 years, with the proliferation of producers and the inertia of a regulatory system that could not accommodate this proliferation, restricted access to products and prohibited product sales channels have been the most frustrating thing for consumers.

Dumping the three-tier system would go some way toward seeing a more diverse product line showing up on the shelves of retailers and on wine lists as retailers would have access to more products that could be purchased directly from producers and importers. But this would not be enough to satisfy an American consumer that has become accustomed to buying directly from producers and receiving regular and easy shipments of goods from nearly any place on the planet.

While wineries, after nearly 25 years of lobbying and lawsuits, have cracked the direct shipment code and opened up the country to their goods, consumers still suffer under archaic bans on shipments of products from brewers, distillers, retailers, and importers. These bans are kept in place today purely out of deference to wholesalers and retailers who demand to be protected from competition and to an institutional bias that sustains Repeal era restrictions on access to alcohol. Any newly designed regulatory system must not invite disrespect-inducing unlawful activity by continuing to impose bans on interstate shipments that frustrate consumers, producers, retailers, and importers particularly when no evidence has ever been presented that direct shipment of alcohol causes any negative outcome for consumers.

A MODERN REGULATORY SYSTEM
Reform of the American alcohol regulatory system amounts to escaping the past and the archaic and outdated presumptions and assumptions that rule the past. There simply are no conditions under which the tied-house inducing immoderate consumption of the pre-Prohibition period could return to early 21st century America. This fact alone ought to disqualify the state-mandated use of a wholesaler from any newly designed regulatory system. Moreover, the state mandate to use wholesalers can’t support an alcohol market where upwards of 30,000 producers strive to sell their goods. Multiple channels to market must be approved by any re-designed system.

Twenty-first-century consumers and their expectations for access to goods must also inform the necessary reforms. Bans on interstate shipment only make sense today if the goal of an alcohol regulatory system is to stymie consumer demand and protect wholesalers and retailers from legitimate competition.

Accounting for the current contours of the American culture, society, economy and technology in place today and down the road, an efficient and fair alcohol regulatory system would look something like this:

1. Separate licensing for producers, wholesalers, and retailers/restaurants

2. Producers and importers may sell to consumers, wholesalers, or retailers

3. Wholesalers may contract with producers and importers, but “Franchise Laws” will not be allowed to skew the balance of power in those relationships

4. Retailers may sell multiple brands to consumers and retailers located in or outside their state of licensure

5. Retailers, importers, and producers may sell and ship wine to consumers regardless of the consumer’s location in the United States.

6. Tied house laws preventing significant investment by a licensee in one tier in licensees in another tier would be prohibited, with some exceptions.

7. Laws that prevent over-serving would be strictly enforced.

8. Laws preventing sales to minors must be strictly enforced

9. Excise taxes ought to be levied at the state and federal levels and remitted by producers and wholesalers for the purposes of funding the regulatory structure, funding enforcement, and adding to the general funds of the states.

This basic outline of a modern alcohol regulatory system is undeniably better, more efficient, and more representative of current attitudes concerning alcohol in the United States. It also has the benefit of not being based on social systems that existed a century ago that could not be reproduced today. Moreover, it puts a focus on preventing overconsumption and community safety without the fiction that a mandated wholesaler or prevention of tied houses is the vehicle for preventing immoderate alcohol use.

THE PROSPECTS FOR REAL ALCOHOL REGULATORY REFORM
Critics of this proposed alcohol regulatory system can’t and won’t make the case that it fails to properly achieve the goals of deterring overconsumption, does not provide a fair playing field for the trade, does not provide for tax collection, and does not respect modern consumer habits. It does all those things far better than the archaic system currently in place.

What the critics will say and may at the moment be correct about is that the politics of alcohol make such reforms unlikely.

At the dawn of Repeal in the early 1930s, there was great concern among policymakers that the inordinate influence the alcohol trade had over local politics be prevented. That goal has failed utterly.

In almost every state, a powerful cabal of a small group of wholesalers wields near-complete control over alcohol politics. Their campaign contribution largess gives them absurd levels of access to lawmakers who have every incentive to support the various unfounded claims about the efficacy of a state-mandated wholesaler, the “dangers” of direct shipping, and appeals to prevent the return to a tied house system of 100 years ago that could not possibly return in today’s social, cultural and economic milieu.

That said, every level of the alcohol trade save for the well-protected wholesale tier would support the system outlined above were they asked to choose between it and the currently formulated regulatory system. Moreover, given the opportunity to support reform as laid out above, every alcohol producer, every retailer, and every importer should do so, and do so as frequently as possible. Even if change is not swift, change only comes through pressure and communication. The value—monetarily, politically and through the innovations it will breed—of this kind of reform is nearly incalculable.