I often times hear that liquor laws are outdated and written in a time when Al Capone and his comrades held sway over the liquor industry. Prohibition ended in 1933 and with it came the writing of new state liquor laws. Influenced by the damage Prohibition inflicted, the new liquor laws were written to create three distinct and separate tiers. In Pre-Prohibition times many immoral saloon owners would overserve their customers, which led to an influx of social ills. Determined to stop this, reformers would not allow suppliers to sell their product at retail, this was meant to take away the incentives for suppliers to utilize their retail facilities as a vehicle for pushing more sales at the expense of creating social ills. In this setup between supplier and retailer was the wholesaler/distributor tier, which acted as a go-between and ensured that there was a wall of independence between supplier and retailer.

As we look at developments over the last ninety years, we see some great changes occurred. The concerns raised by saloons serving their own products has dissipated. Bars generally cannot be owned by manufacturers; however, craft brewers, wineries, and distillers are able to manufacturer their own products and sell them at retail.

In essence, the main purpose behind creating liquor laws post-prohibition has waned in influence and state laws throughout the country knocked down the walls that separated the tiers.

However, one pillar stands strong, not based on the need to control for societal ills, but the need for economic protectionism. That pillar is the mandated wholesaler tier. This pillar requires that any retailer that wants to sell product must purchase their products from an in-state wholesaler. The in-state wholesaler network represents the only place where a retailer can purchase product for sales to consumers. (In limited circumstances in certain states, a craft manufacturer has limited self-distribution rights, this granting of rights for a manufacturer to cross tiers has not led to societal ills).

By legal allowances through craft producer retail sales, we admit that the societal ills from the Al Capone Era are not the major concern they once were.  Without Al Capone driving the engine of the liquor regulatory systems in modern days, why is the system still around?

It exists because the liquor regulatory world is not influenced by 1933 but by 1773.

The liquor regulatory world today is not influenced by Al Capone but by the motivates of King George III of England, the King that wanted the Colonist to buy their tea from one source. By laws banning tea from other sources and drafting laws making it economically infeasible for colonial tea companies to exist in the market, King George setup a system where tea could only come from one place, the East India Company.

Obviously, King George III misread the passion of the colonists and his mistakes led to protest and eventually revolution.

King George III may have lost the revolution, but his economic principles unfortunately never died!

The liquor wholesaler laws mandate that the consumer’s market for goods is limited to what the in-state wholesaler market provides. A consumer can only purchase what is available at in-state retail stores and those stores can only supply product available through the in-state wholesale market.

If the in-state wholesale market does not carry a product, the consumer is out of luck. When consumers want to go online and purchase product not available through the in-state wholesale network, most state laws deny the consumer the right to go online and purchase the product their home market does not provide. (The one exception thanks to the Supreme Court decision in Granholm, is domestic wines)

The political class, influenced by the liquor wholesalers, writes laws limiting a consumer’s right to purchase a specific product. Similar to King George III who wanted tea purchased from one source, the wholesalers want the consumers to purchase their product from one source.

As we look back on the history of the liquor system, strict three-tiers were mandated based on the societal ills that predated 1933. The strict three-tier system was abandoned when craft producers came along and the ills of 1933 were not as prevalent in the modern society.

However, as history changed, it still remains the same. The economic theory of King George III, which led to the great American Revolution and led to our Independence, unfortunately still exist today!

What one can hope for is societal change breaks down these reigns and the advent of online markets, greater variety, greater access to information, and consumer choice influences a change.

As it stands Al Capone’s influence is waning but unfortunately King George III’s influence in the liquor system is still strong and robust!