In 1830 America was sozzled. The average person drank about two bottles of whisky per week – that’s seven gallons of pure alcohol per year. So the temperance movement – comprised mainly of the long-suffering wives of American drunkards – lobbied to have the demon drink banned. In 1920, they finally got their way.
The Eighteenth Amendment to the US Constitution introduced a national ban on the sale, production and transportation of alcohol throughout the United States on 16 January, 1920. The ban – prohibition – lasted until it was repealed by Franklin D Roosevelt in December 1933. The intention of the ‘dry’ movement was to reduce crime and corruption, solve social problems, lower the tax burden caused by prisons and poorhouses, and improve health and hygiene in America. It failed utterly, on every level.
A strange coalition supported prohibition. It was backed by the temperance movement – religious types who were against alcohol on moral grounds – and was supported by the bootleggers. Their thriving trade in illegal liquor was dependant on the ban.
Far from reducing crime and corruption, it boosted both. One New Jersey businessman claimed that there were ten times more places to obtain alcohol during prohibition than there had been before. Al Capone, one of the most infamous beneficiaries of prohibition until his conviction for tax evasion in 1931, was by 1927 earning $60m a year from alcohol sales alone. Some of those revenues were recycled back to the police and leading politicians, upon whom it is believed he spent around $75m. But he could afford it: he had a thriving business. As he pointed out to his critics, with some justification, “all I do is satisfy a public demand”.
Not only did spending on alcohol increase, so did spending on alcohol substitutes. Beyond patent medicines, consumers switched to narcotics, tobacco, hashish and marijuana. Not only were these products potentially more dangerous and addictive than alcohol, the act of procuring them brought consumers into contact with a criminal underworld. Far from improving public health, prohibition savaged it. The death rates from poisoned liquor were appalling. In 1920, there were 1,064 deaths from tainted alcohol. By 1925, the toll had risen to 4,154. Will Rogers joked that “governments used to murder by the bullet only. Now it’s by the quart.” And the prison population exploded. The homicide rate during the 1920s rose by 78% compared to the period before prohibition. Total federal expenditures on penal institutions increased by more than 1,000% between 1915 and 1932. Two thirds of all prisoners entering the penal system in 1930 had been convicted of alcohol and drug offences.
So what did prohibition really achieve? By making it illicit, it made alcohol more dangerous to consume. Crime increased and become ‘organised’. The courts and prison systems were stretched to their limit. Corruption of public officials grew markedly. There were no measurable gains in terms of either productivity or reduced absenteeism. Prohibition removed a potent source of tax revenue even as it increased government spending: the annual budget of the Bureau of Prohibition rose during the 1920s from $4.4m to $13.4m, while Coastguard spending on prohibition averaged over $13m a year. More crimes were committed because prohibition destroyed legal jobs whilst creating black market violence.
This supposedly noble but actually dismal experiment finally ended in early 1933 when President Roosevelt signed an amendment to the earlier prohibition legislation, known as the Cullen-Harrison Act. Having signed, he added: “I think this would be a good time for a beer”.
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Paved with good intentions…
What politicians and bureaucrats so often forget is that actions have unpredictable consequences.
The central banks were formerly limited to shifting interest rates to try and control inflation. Forget inflation. Given the magnitude of the global debt crisis, now the central banks are moving heaven and earth to try and avoid deflation – which in a fractional reserve, fiat currency world is in itself astonishing.
Now our central banks are going further than they’ve ever gone before, and have started buying up all sorts of financial assets under the guise of quantitative easing (QE) in order to initiate a new ‘noble experiment’ which I think is destined to be just as successful as the one that the US government finally abandoned in 1933.
So my single biggest concern today is that the financial markets have become captive to the whims and vicissitudes of clueless central bankers. Investors now place their bets not on the basis of an assessment of company fundamentals or the relative attractiveness of asset A versus asset B, but primarily on the basis of QE.
The disaster of prohibition throws into focus the unintended consequences of government interference in free markets. There are similar lessons yet to be fully learned in the hugely costly ‘war on drugs’. But the dangers and surely unintended consequences of unparalleled government intervention in financial markets, upon the wider economy, and across society as a whole, are only now starting to become visible. Western governments are now acting as puppet-masters for their own stock and bond markets, in many instances replacing the core functions of banks by extending or guaranteeing housing loans, and manipulating prices throughout the capital structure of the entire economy. This cannot possibly end well.
The latest wheeze
Arguably the global financial crisis had its proximate origins in the spectacular bursting of a housing bubble throughout the US, the UK and much of Western Europe, together with abysmal lending practices that helped inflate – and widely distribute the cost of – that same bubble. So what is the latest policy wheeze of the UK government? To prop up already inflated property prices via its ‘Help to Buy’ scheme which pledges support for home purchasers with as little as a 5% deposit. As taxpayers, we will all be on the hook for this scheme. SocGen strategist Albert Edwards could barely contain his contempt at this one:
“Why are houses too expensive in the UK? Too much debt. So what is George Osborne’s solution for first-time buyers unable to afford housing? Why, arrange for a government-guaranteed scheme to burden our young people with even more debt! Why don’t we call this policy by the name it really is, namely the indentured servitude of our young people.
“I believe it truly is a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business. It ranks above some of Alan Greenspan’s very worst blunders.”
I’ve been writing The Price Report for over six years now – since just before the global financial crisis began. My worst fears at that time – a global market crash affecting both bond and stock markets – were never fully realised, in large part because of government interference in the free market process. You may argue that it’s a good thing we avoided such a crash. I would argue, by way of response, that all the central banks have really achieved is financial Armageddon deferred.
• This is article is an excerpt from Tim’s newsletter, The Price Report. You can find out more and watch an interview with him here.
• The Price Report is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares; never risk more than you can afford to lose. Past performance is not a reliable indicator of future results. Please seek independent financial advice if necessary. Customer Services: 020 7633 3600.
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