Politics

Prohibition began 100 years ago – here's a look at its economic impact

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Key Points
  • A century later, Prohibition is known for accomplishing everything it wasn't supposed to — it provoked intemperance, eliminated jobs, created a black market for booze, and triggered a slew of unintended economic consequences.
  • The federal government lost approximately $11 billion in tax revenue and spent more than $300 million trying to keep America on the wagon, a historian says.
  • Other industries, such as the rental market and the soft drink sector, expected to benefit from Prohibition, but such a boon didn't materialize.
New York restaurant with a sign in the shop window: 'No Booze Sold Here - Booze Hounds Please Stay Out.'
Ullstein bild | Getty Images

Prohibition, which began 100 years ago Friday, didn't just put the squeeze on the booze industry. It took a much broader toll on the American economy.

On Jan. 17, 1920, the United States stumbled into a dry era following the ratification of the 18th Amendment and the passage of the Volstead Act. For 13 years, Americans waited for the quality of their lives to improve while the federal government spent millions trying to enforce the "noble experiment."

A century later, Prohibition is known for accomplishing everything it wasn't supposed to — it provoked intemperance, eliminated jobs, created a black market for booze, and triggered a slew of unintended economic consequences.

"When Prohibition went into effect about a quarter of a million people lost their jobs. We were already in a mild recession, we were coming out of World War I, and we had all these soldiers that were coming back from Europe that we had to reintegrate into the economy," historian Garrett Peck told CNBC.

"So this was a big deal and it became an even bigger deal come the 1930s with the Great Depression," Peck, the author of "The Great War in America: World War I and Its Aftermath," added.

The stock market crash of 1929, which triggered the country's worst economic slump, proved to further test Prohibition with nearly half of the nation's banks failing and some 15 million Americans unemployed.

Meanwhile, Prohibition created a "shadow economy" that was run by crooks and thugs, said spirits and cocktail expert Derek Brown, while causing lasting damage to the alcohol and hospitality industries.

"Institutions closed. Distilleries floundered. We wouldn't regain craft bartending skills until the late 20th century with the emergence of the craft cocktail movement," said Brown, who owns Washington, D.C.'s famed cocktail bar Columbia Room and wrote "Spirits, Sugar, Water, Bitters: How the Cocktail Conquered the World."

"You have to remember that in the mid-19th century Americans were drinking nearly seven gallons of pure alcohol per person. It was ingrained in our economy. It was even sometimes used as currency," he added.

According to historian and author Michael Lerner, other industries believed they would reap benefits from Prohibition –but the social and economic impacts of Prohibition were largely negative:

When the law went into effect, they expected sales of clothing and household goods to skyrocket. Real estate developers and landlords expected rents to rise as saloons closed and neighborhoods improved. Chewing gum, grape juice, and soft drink companies all expected growth. Theater producers expected new crowds as Americans looked for new ways to entertain themselves without alcohol.

None of it came to pass.

Instead, the unintended consequences proved to be a decline in amusement and entertainment industries across the board. Restaurants failed, as they could no longer make a profit without legal liquor sales. Theater revenues declined rather than increase, and few of the other economic benefits that had been predicted came to pass.

Lerner adds that the federal government lost approximately $11 billion in tax revenue and spent more than $300 million trying to keep America on the wagon.

What's more, doctors pocketed an estimated $40 million in medicinal whiskey prescriptions and the bootleg market saw earnings of $3.6 billion in 1926, or approximately $50 billion in today's dollars.

On Dec. 5, 1933, the 21st Amendment repealed the 18th Amendment, ending the increasingly unpopular nationwide prohibition of alcohol.

"A hundred years later, the alcohol and hospitality industry is worth hundred billions of dollars," cocktail expert Brown said. "Can we just agree that next time we want people to drink less, that instead of tanking an entire industry, and everyone who depends on it, we just ask nicely?"