U.S. Liquor Industry (Fortune, 1931)

February 24, 2013, 7:00 PM UTC

Editors note: Every Sunday Fortune publishes a relevant story from our magazine archives. This week, as Anheuser-Bush InBev began talks the U.S. Justice Department to resolve antitrust concerns over the beer maker’s planned  deal with Grupo Modelo, maker of Corona beer and other brands, we turn to a 1931 story about the U.S. Liqour Industry. And from past to present, take a look at how the industry has change in a feature Fortune published this week.

The liquor business is big business and follows essentially the distribution methods of any big business. It boasts a normal alignment of national operators, middlemen, and retailers; uses railroads, fleets of trucks, steamers, barges, airplanes, et al. The secrecy with which its operations are carried on is not such as would seem out of place in, say, the chemical industry, where armed guards patrol locked factory gates; or in the factory of any canny manufacturer who sets his dials to read in error and so deceive competitors’ spies as to the temperature of his annealing. (Nor is the industry unique in arranging its profits in the interests of a reduced income tax.) It has its own form of tariff, our paternal government doing its best to keep out foreign competition–using methods which succeed, tariff-like, not in prohibiting importation but in making it inconvenient and too expensive for mass profits. In fact, the first lesson a student of the liquor industry must learn concerns this very normalcy. Only in the fiction of the Sunday Supplement is the business of supplying the U. S. A. with alcoholic beverages any more glamorous or romantic than the business of supplying it with canned peaches or cellophane or steel.

A broad survey breaks the industry into four arbitrarily chosen fields: importing, rural bootlegging, local small-city businesses, and metropolitan operations (among which last minority flourishes the over-dramatized racketeer). The import volume is small. It reaches the country largely by boat, through California, Texas, Florida, New Jersey, and New York, and along the New England coast. Canada exports to the U. S. mainly over the eastern half of its border. The use of the airplane is increasing, notably over regular lines operating into Michigan and Minnesota, and also over Texan and New England borders. The rural bootlegging business has reached its highest development through the South (almost solidly committed to this type of distribution) and West. There small stills operate, using sugar, corn meal, molasses, and many other bases–including potato peels. Increasingly their product is being collected on routes much like milk routes, taken to town, and marketed for the producers. In the Northeast, rural bootlegging operations center on apple liquors, distilled or undistilled. Wine and beer will presently be fitted into the picture, but by and large the national preference is for a beverage mellowed with a charcoal stick and made for impact. This local business has saved whole counties from bankruptcy and starvation. Distributors report the taste for corn liquor steadily growing, certain sections already having acquired definite reputations for superior products which command higher prices.

The small-city business enjoys the advantages of segregation. Not easily reached by big bootlegging centers, such cities as Salt Lake City, Omaha, or any southern city are served by small businesses, happily adjusted to local demand and taste. Output from the local stills and breweries is supplemented by small quantities of imported liquor, and the alcohol makings of gin, rye, and scotch, shipped by truck and train from big cities. Such local distillers would be the shakiest of marginal producers in the big centers. In smaller ponds, they prosper, though even liquor feels 1931 depression.

The big-time city business–spider nets of beer and alky (alcohol) routes, smuggling routes, victim of the hijackers and imaginations of wild-eyed feature writers, source of most extravagant profits for producer and government agent–has been made, because of the size of its units and its more secret dealings, to seem too important. It does, however, spread out from such big, wet cities as New York, Chicago, Detroit, Los Angeles, and from such strategic centers as Buffalo and Seattle. It caters to wide demand, serves large patches of territory, and has hook-ups that stretch halfway across the country. A railroad carload of alcohol has been traced from Philadelphia to Omaha, but this happens infrequently. Long shipments are usually made only to fill up gaps caused either by the death or suddenly stopped operations of a local producer.

Over big-time routes, beer will go from New Jersey west to Cleveland. Detroit imports will flow back as far as Pittsburgh. Big cities send alcohol and beer to small towns, get corn liquor, applejack, and wine from the country. Though wine is usually drunk where made, California sends its huge surplus of wine, grapes, or potential wine (in the form of solid or liquid fruit concentrates) over the railroads to all the country. Trucks are the most publicized, but railroads an often-used means of distribution. Truckers use main highways (except in crossing borders or in strict states like Virginia), having found it cheaper to bribe all the policemen on a good, well-patrolled road than to run the risks of hijackers and lost time on back roads. Last winter, the Lincoln Highway was “fixed” from Chicago straight through to Omaha. Only in Lee County, Illinois, did runners watch out for police.

Most hard liquor consumed in the U. S. is illegally distilled in the country. Corn sugar, the most widely used ingredient, is growing in popularity. Clean, giving off no odor, and leaving no ash, corn sugar is ideal for the big distiller who must operate secretly. It is also slightly cheaper than cane and beet sugar, an important advantage in a highly competitive industry.

Cane and beet sugar are most easily bought in small quantities by smaller producers, and therefore best suited to their needs. The South uses mostly cane sugar, the West uses beet–particularly Colorado, loyal to its home industry. But cane and beet sugar, once most widely used, have fallen behind corn. Corn meal and grain are used by the small stills of farmers, Negroes, backwoodsmen in the South and West. Molasses, also widely used in the South, yields an inferior and easily spoiled product.

Alcohol, diverted to illegal uses for which it was not designed when distilled by industrial alcohol plants, finds its way almost entirely into the hands of big producers who can afford the expensive processes of redistilling the poisonous and unpotable industrial product. Mineral oil is used in removing certain obnoxious ingredients, the disposal of the then spoiled oil being a definite manufacturing problem. All industrial alcohol companies suffer–the term is not used in its economic sense–from diversions. Technically at least, industrial alcohol-makers are guiltless when they sell the popular (which means most easily redistilled) brands of alcohol to fake varnish and perfume-makers.

Imported hard liquor is surprisingly unimportant in quantity, as has been mentioned. Less than 3 per cent of all liquor consumed is imported. Diverted medicinal liquor is even less important.

Wine enjoys a peculiar legal immunity, in addition to a certain psychological immunity coming from Biblical sanction. As an instance: selling beer kegs makes you a criminal; selling wine presses does not. Ninety per cent of American wine originates in California. California grape-growers, aided by government subsidies, are better off now than ever before. Until recently the grower shipped grapes to the local bootlegger, usually an Italian who ran a restaurant or an ice, coal, and wood business. But the discovery of the advantages, legal and otherwise, of concentrates which can easily be made into wine has changed the aspect–whether permanently or no cannot yet be decided, since the first batches of concentrate wine have not matured enough to bring in re-orders. The story goes that, when AI Capone offered to distribute the concentrate nationally at $1 a gallon, Fruit Industries, Ltd., largest organization of grape-growers, righteously though wistfully refused. Homemade wine is nationally popular, and the import business restricted to a few hundred thousand gallons of champagne and fine wines.

The great beer belt swishes from Minnesota and Wisconsin in a wide and gentle curve down to the Middle Atlantic states. New Jersey, greatest of beer states, and Pennsylvania towns like Scranton–where unemployed miners may earn a few dollars tending beer vats–supply most of the great eastern demand. Illinois quenches her own enormous thirst and spills a surplus into surrounding states. Home-brew is generally favored, particularly as a summer drink, all over the country. “Beer flats,” which are merely speakeasies run by “beer mamas” (hostesses), dot the Middle West and run down as far southeast as Washington, D.C.

There are four kinds of beer: alley beer, the great bulk of commercial beer, so called because its brewery is on an alley where trucks are less noticed; home-brew, made everywhere, especially where cellars are handy; needle-beer, near-beer into which alcohol or drugs have been injected (if a drug, like ether, is used, the beer is non-alcoholic and therefore legal); and diverted beer, near-beer which has not (as all near-beer should be) been dealcoholized. (Near-beer is always first brewed full strength.) Alley beer and home-brew are by far the most important.

As to the industry’s income, the figure popularly quoted is $3,000,000,000. Like all large generalities, it doesn’t mean very much. Accepted tables of 1914 consumption of alcoholic beverages list consumption (in millions of gallons) as: imported spirits, 4; domestic spirits, 139; wines, imported and domestic, 54; beer, 2,056. The figures arrived at in the compilation of our chart compare with these as follows: spirits, 113 (of which imports are estimated at approximately 3); wines, domestic alone, 114; beer, 745. It is, of course, as difficult to get exact figures on the liquor business as it would be to obtain statistics which might affect trade secrets in any other industry–and the volume most producers of alcoholic beverages are able to maintain is very much of a trade secret. Moreover, since the industry pays only indirect taxes in the form of seizures, padlocks, etc., there is little reason for it to employ statisticians. A great deal of nonsense is written concerning computed totals by both pro- and anti-prohibitionists. Our figures, averaging theirs, indicate that the nation consumes considerably less beer (although the beer industry, still producing 745,000,000 gallons, is still to be reckoned with), less hard liquor (by about 20 per cent). The wine consumption seems, however, to be doubled. Whatever the truth of these figures–and we make no claim for them beyond the fact that they average government reports with statistics independently but conscientiously compiled–the net is obvious: the U. S. liquor industry ranks, in finances invested and in volume of goods produced and consumed, with other great industries … and should, rationally, be considered as one.

A current fallacy seems to be that, if this great industry should be legalized, employment will be given to thousands, immense amounts of raw materials will be consumed. The numbers which are to be employed and the material to be consumed are tabulated on the basis of pre-prohibition statistics. This argument takes for “its naïve premise the nonexistence of any liquor industry today, supposes that the hour the Volstead Act went into effect the industry ceased to exist, and may now be revived with prosperity for all. Obviously, should liquor be legalized, increase in employment and consumption of goods would result only if the existing industry were able, under better auspices, to broaden its markets. And the increase would be only by that increment of expansion. The government would, of course, derive a revenue, instead of incurring an expense, in taxing the industry–but that is another question.

The national market as a whole is best broken down geographically. New England is calm, not at all troublesome to agents. Vermont and New Hampshire get Canadian imports on their way down. Maine, which has ignored prohibition longer than any other state (it’s had it longer), quietly drinks imports, hard cider, and homemade liquor. Down in Massachusetts, however, interurban trade is highly organized. Boston drinks mostly rye and gin (little scotch) brought in through New Bedford. Gin, by the way, is losing popularity as a national drink. Along with Connecticut, the rest of Massachusetts drinks some New Jersey beer, much synthetic gin, and some badly watered imports.

Upstate New York likes homemade cider and wine, and is the great applejack center. Buffalo is a steady Canadian importer. New York City drinks its own beer and bard liquor, gets more from New Jersey, uses up most of its imports from the great Atlantic rum row (now not what it used to be), and is the greatest buyer of California wine and grapes. New Jersey and Pennsylvania drink their own beer, with southern New Jersey supplying Philadelphia, and drink a lot of cut imports. Alky stills in New Jersey are enormous. In Philadelphia, drastic clean-ups have wiped out most speakeasies and forced the trade into office-building selling. It is still, however, an important sugar- and diverted-alcohol center. Tough-stomached Pittsburgh drinks “white mule” and “third rail” in its mooney joints, which are low-grade speakeasies, and swaps alcohol with West Virginia for corn liquor. Clinton County, Pennsylvania, a great still center, is called the Kentucky of the North. West Virginia miners, catering largely to home and Pennsylvania taste for corn, have cut into the old mountaineer business.

Maryland is, by and large, the quality liquor state. Its St. Mary’s rye, made by proud and conscientious Eastern Shore distillers, is staple in Baltimore and Washington. Maryland corn and applejack, made in the back counties, is less famous but no less excellent. Washington also drinks good Bluemont corn from Virginia and some Pennsylvania beer. Virginia, strictest of enforcement states, drinks its own corn, made by prosperous local distillers.

The eastern South is solid with stills and soaked with corn. Trade static and local. Large stills on the outskirts of big towns, tended by Negroes though owned by whites, supply the population centers. Some imports come through Savannah and Florida, but southern connoisseurs are content to drink such excellent liquor as that made in Berkeley County and the country around Greenville, South Carolina, or other products of more local fame. In Kentucky and Tennessee, there are organized collection routes winding from still to mountaineer still, and leading to county centers. The Mississippi and Ohio rivers are convenient and always-used avenues of trade. Arkansas has its “Ozark” liquor and the popular “Garland City Pride,” which is sent through Texarkana as far away as Dallas. New Orleans has its own rum row, which brings cheap sugar and cactus alcohol from Mexico, and also drinks strong bayou spirits. The Texan has a low taste in drink. He calls his mixtures “shake-up drinks,” with “Victoria No. I” the favorite alcohol and Mexican cactus alcohol the cheapest.

Jumping back North: Ohio is very wet and the bewildered center of innumerable rings and circles. Big cities are mighty beer drinkers, and prosperous Perry County’s chief industry is making corn liquor. Indiana makes possession of liquor a crime, so the Indianan drinks homemade stuff like clover-blossom wine, banana brandy, and silo liquor, and imports, cautiously, from Chicago.

Detroit, ideally situated for smuggling, takes full advantage of its location. It supplies most of Michigan’s needs and its imports go east and west for hundreds of miles. Practically all the boats tied up at the waterfront streets of Detroit’s little neighbor, Ecorse, are rum-runners. The Detroit River is thick with liquor boats. When enforcement on the river gets stricter, the boats move over to Lake Erie for a while, and when the river freezes over, sleds are used. Detroit vernacular is interesting: shore-watchers are “airedales,” guards are “gorillas,” and runners, “monkeys.”

Illinois, most notorious of liquor states, is a great manufacturer, a lusty consumer, and an open distributor, running liquor and rackets jointly and profitably. Its tastes are eclectic. Big cities import from New Orleans and Savannah, and drink Detroit Bourbon; but in Egypt a favorite drink is half port wine, half corn whisky. Illinois drinks much beer, but has plenty left over to send to neighboring states. Export points for alcohol are Aurora, Cicero, and Chicago Heights.

Iowa takes Illinois liquor; so do the Dakotas. All through the Middle West, of course, corn and sugar alcohol are made; in the Dakotas, every fourth farmer makes corn for his three neighbors. Kansas, second oldest prohibition state, has had years to build up a self-contained industry, and local operators endeavor to keep invaders out by such tricks as spreading tacks to puncture truck tires. Kansas, though righteous, has bad tastes. It drinks such nauseous home products as “sand-hill rye,” “sugar-moon” whisky, spiked beer, spiked soft drinks, and poorly made home-brew. But its “Corona” rye is good. Oklahoma oil fields take liquor straight.

Missouri is well situated on the River, and gets liquor either from New Orleans or Chicago. Anheuser-Busch now makes ice cream, but St. Louis still drinks beer. Nebraska, like Kansas, is self-contained and jealous of outsiders. Omaha has its small-pond Capone who distributes alcohol efficiently through the state.

Most famous of all middle-western drinks is “Minnesota 13,” made from a University-developed corn called Northern Dent No. 13. Minnesota also has its pleasant beer farms where autoists go of an evening for beer and dancing. Minnesota Holdingford and Somerset ryes are good, but much alcohol comes from Chicago to be distributed by wholesalers. But, above all, Minnesota–and Wisconsin too–prefer beer, made in Milwaukee and Minneapolis.

Dropping South again: New Mexico’s and Arizona’s small population makes large-scale operation unnecessary. Prosperous local bootleggers serve the cities with El Paso imports or local distillings. Cheap liquor is “tezuin” or “tezuino,” made by Indians and with a tremendous wallop.

Colorado drinks beet-sugar alcohol and only Denver cares about labels. Wyoming drinks everything straight–corn whisky, fruit brandies. In rural sections, illegal forms of speakeasy licensing yield funds for road and other local improvements. Idaho and Montana also drink it straight, but Idaho likes cherry and prune wine as well. In Utah, Salt Lake City drinks privately and serves the southern half; Ogden, more sophisticated (what with the Southern Pacific and the Union Pacific meeting there), drinks openly and serves the north. Provo, Senator Smoot’s town, is proud of being called the most moral town in America, so bootleggers meet customers on the darker street corners. Reno drinks most of Nevada’s disproportionately large quota. Divorcing visitors drink imports–the best comes from Sacramento–but the home folks drink the cheaper grades.

Big rings operate in Washington and Oregon, distributing Canadian imports, distilling and collecting locally. Southwestern Washington and northwestern Oregon produce most of the hard liquor in small fifty-gallon stills.

Northern California gets grain and sugar alcohol from San Francisco and Sacramento, but also boasts a great many stills in the Sierra foothills. San Francisco imports come either from Canada or Mexico, whichever happens to be more convenient. Los Angeles, center of the southern trade, imports only from Mexico. (Al Capone tried to get into Los Angeles, but stumbled back to Chicago, impressed by the super-tough and powerful Los Angeles gangsters and bootleggers.) San Diego is practically in Mexico, and California as a whole is wet, the prize enforcement stunt being the padlocking of a redwood tree which housed a still.

Wine, of course, is the great California drink and the bulwark of the grape-growers. Fruit Industries, Ltd. produces about 75 per cent of California’s total and about 50 per cent of the nation’s.

Read More

CryptocurrencyLeadershipInvestingClimate ChangeMost Powerful Women