John D. Rockefeller, Jr. although a lifelong teetotaler and long-time supporter of the Anti-Saloon League, realized the total and utter failure of Prohibition. Accordingly he commissioned the best policy makers, best thinkers, and best people in government. The chosen individuals had experienced both pre-Prohibition abuses and Prohibition’s lawlessness. As a result, these individuals were able to identify the types of political, economic and regulatory structures necessary to replace the 18th Amendment while not resorting back to the days of tied house saloons.
The product of their efforts was the seminal report of contemporary American alcohol policy. It was written by Raymond B. Fosdick and Albert L. Scott: “Toward Liquor Control.” That report established the blueprint for states and policy makers as they prepared for the return of alcohol. Today all 50 states, to some degree or another, have implemented many of the timeless principles outlined by Fosdick and Scott. The principles outlined in Toward Liquor Control were borne out of the experience of the enormous social costs of an unregulated alcohol industry that had led to the chaos and lawlessness of Prohibition; and those principles are as relevant today as they were then.
The primary, central issue in Toward Liquor Control was restoring respect for law and the most controversial issue was the authors’ preference for state authority and/or public monopoly of “heavy” or high alcohol products over the method of regulation by license. Though Fosdick and Scott clearly preferred control by public monopoly, they understood the critical importance of being flexible and reasonable in balancing availability and control of alcohol.
Two models of Alcohol Control were proposed; 1.) Public Monopoly (18 Control States) and, 2.) Regulation by License (32 States, three-tier, state based, licensed, independent, private).
Today, all 50 states have implemented and inserted a middle tier.
Montana is a hybrid: a control state for spirits or hard liquor and a license state for beer and wine. Thus, while the State controls the sale of the former products, private businesses known as distributors are licensed and sell beer and wine to licensed retailers.
Though Toward Liquor Control preferred public monopoly because the authors feared the drive for profits would encourage private businesses to sell more alcohol, they understood that flexibility for each state to establish their own method of alcohol control was more important than requiring one size fits all. Regardless of the two models proposed, both were specifically created to promote respect for the law, orderly markets, collection of revenue and temperance. The authors’ proposed method to achieve those goals was to insert a middle tier, specifically intended to provide checks & balances together with transparency & accountability, through a state-based, regulated system of alcohol control reflective of the morals and values of the citizens of the city, county or state.
The mechanism to balance availability and control is the insertion of a middle tier between the producers and the retailers, specifically tasked with preventing the abuses of tied house and preventing vertical integration.
The Purpose of Liquor Regulation
2. Orderly markets
3. Respect for law
4. Collection of Revenue
The major provisions of virtually all State-Based Three-Tier Regulations are:
• Three-tier separation, tied house prevention
• At Rest Laws (alcohol comes to rest in an in-state distribution warehouse before sale to retailers)
• Central Warehouse restrictions (retail outlets buy only from distribution warehouses)
• Retail to Retail restrictions (one retailer, e.g., a bar, may not purchase alcohol from another retailer, e.g., Costco)
• Price Discrimination restrictions
• Volume Discount restrictions
• Credit Restrictions
• Post & Hold Provisions (distributors are required to post alcohol prices and maintain that pricing level for a specified period of time).
• Minimum Markup Provisions
• Franchise Laws protecting middle-tier independence
Over 80 years later, the uniquely American system of state based, three-tier alcohol regulation and independent licensed distributors stands as one of the best examples of that optimal balance of transparency and accountability, availability and control, and private efficiency and public interest.