The Economics of Moonshining

In 1862 a tax of 20 cents a gallon was levied. Early in 1864 it rose to 60 cents. This cut off the industrial use of spirits, but did not affect its use as a beverage. In the latter part of 1864 the tax leaped to $1.50 a gallon, and the next year it reached the prohibitive figure of $2. The result of such excessive taxation was just what it had been in the old times, in Great Britain. In and around the centers of population there was wholesale fraud and collusion. “Efforts made to repress and punish frauds were of absolutely no account whatever.... The current price at which distilled spirits were sold in the markets was everywhere recognized and commented on by the press as less than the amount of the tax, allowing nothing whatever for the cost of manufacture.”

Seeing that the outcome was disastrous from a fiscal point of view—the revenue from this source was falling to the vanishing point—Congress, in 1868, cut down the tax to 50 cents a gallon. “Illicit distillation practically ceased the very hour that the new law came into operation; ... the Government collected during the second year of the continuance of the act $3 for every one that was obtained during the last year of the $2 rate.”

In 1869 there came a new administration, with frequent removals of revenue officials for political purposes. The revenue fell off. In 1872 the rate was raised to 70 cents, and in 1875 to 90 cents. The result is thus summarized by David A. Wells:

“Investigation carefully conducted showed that on the average the product of illicit distillation costs, through deficient yields, the necessary bribery of attendants, and the expenses of secret and unusual methods of transportation, from two to three times as much as the product of legitimate and legal distillation. So that, calling the average cost of spirits in the United States 20 cents per gallon, the product of the illicit distiller would cost 40 to 60 cents, leaving but 10 cents per gallon as the maximum profit to be realized from fraud under the most favorable conditions—an amount not sufficient to offset the possibility of severe penalties of fine, imprisonment, and confiscation of property.... The rate of 70 cents ... constituted a moderate temptation to fraud. Its increase to 90 cents constituted a temptation altogether too great for human nature, as employed in manufacturing and selling whiskey, to resist.... During 1875-6, highwines sold openly in the Chicago and Cincinnati markets at prices less than the average cost of production plus the Government tax. Investigations showed that the persons mainly concerned in the work of fraud were the Government officials rather than the distillers; and that a so-called ‘Whiskey Ring’ ... extended to Washington, and embraced within its sphere of influence and participation, not merely local supervisors, collectors, inspectors, and storekeepers of the revenue, but even officers of the Internal Revenue Bureau, and probably, also, persons occupying confidential relations with the Executive of the Nation.”