II THE DEVELOPMENT OF THE WHISKEY TRUST 1 T is probably too soon to tell with even a reasonable degree of certainty what the outcome of the present tendency towards combination among producers is to be. So far there have been not a few egregious failures, the most noteworthy being the collapse of the copper syndicate though that was hardly a trust, technically speaking; but there have been also a few apparently noteworthy successes. It seems clear, at any rate, that we have still some time to wait before we can say what the resulting normal is to be; and in the meantime it seems best not to be too hasty in exterminatory legislation, in sweeping denunciation nor in unqualified praise, but to study as accurately as is possible the history, management and tendency of the individual organizations, that when the time for action comes we may act with knowledge. The present article is an attempt to describe, as accurately and fully as the information that can be secured will permit, one of the (apparently, at least) most successful of these organizations: "The Whiskey Trust"; more accurately: "The Distillers' and Cattle-Feeders' Trust." The significance and tendency of such an organization as this cannot be understood without a knowledge of the circumstances leading to its formation. In this case, interest is added by the fact that legislation by the United States and by some European nations is, doubtless, indirectly responsible in good part for the condition of business that led to the formation of the trust. It is well known that, from the establishment of our government till the outbreak of the Civil war, distilled spirits were for the most part comparatively free from taxation by the United States. The tax levied by the recommendation of Alexander 1 Abridged from the Political Science Quarterly, Vol. IV, 1889, pp. 296-319. For additional references, see footnote on p. 45 infra. Hamilton, which led to the Whiskey insurrection in Western Pennsylvania, was comparatively very light (only 9 to 11 cents per proof gallon, as compared with 90 cents at present), and even this was repealed soon after the accession of Jefferson to the presidency. From that time, with the exception of four years (from 1813, when an increase of revenue was necessary to carry on the war, till 1817), spirits were free until the outbreak of the Rebellion. As a consequence, they were sold at a very low price, 24 cents on the average in New York for the five years preceding 1862, with a minimum price of 14 cents per proof gallon, and there was little temptation to overproduction for either the home or foreign market. At the outbreak of the Rebellion the necessity for increased revenue that led to the imposition of internal taxes wherever it was thought that a revenue could be raised, "without much regard to acknowledged politico-economic laws or precedents," 1 resulted, of course very properly, in the taxation of distilled spirits. The first tax of 20 cents a proof gallon (July 1, 1862) was followed, March 7, 1864, by an act raising the tax to 60 cents per gallon. July of the same year the rate went to $1.50; and January 1, 1865, to $2.00 per gallon. At each increase of the tax, considerable time intervened before the highest rate was imposed. As a natural consequence, distilleries were run to their utmost capacity, and even new distilleries were built to get a stock on hand.2 As Mr. H. B. Miller, the president of the whiskey pools, writes: Some time intervened before the various amounts were collected, and during this time the distiller and speculator had nearly the whole benefit of the tax without paying it. The speculation in whiskey during this time was tremendous. Editors, ministers, statesmen, all took a hand. Distilleries were erected all over the country, and at the end of the war there was three times the capacity that could be utilized. 1 Reports of United States Revenue Commission, 1865–66, p. 2. 2 Ibid. P. 6: "Thus, for example, the commission estimate that on the 1st of July, 1864, the date when the advance in the tax on distilled spirits of from 60 cents to $1.50 per gallon took effect, there were made and stored, in anticipation of this advance, at least forty millions of gallons, or a quantity sufficient to supply the wants of the country for at least a year in advance." To the same effect David A. Wells, in the article on "Distilled Spirits" in Lalor's Cyclopedia of Political Science, writes: The immediate effect of the enactment of the first three and successive rates of excise was to cause an almost entire suspension of the business of distilling, which was resumed again with great activity as soon as an advance in the rate of tax in each instance became probable. The stock of whiskey and high wines accumulated in the country under this course of procedure was without precedent; and Congress, by its refusal to make the advance in taxation, in any instance, retroactive, virtually legislated for the benefit of distillers and speculators rather than for the treasury and the government. The profits realized by the holders of stocks, thus made in anticipation of the advance in taxation, has probably no parallel in the history of any similar speculation or commercial transactions in this country, and cannot be estimated at less than $50,000,000. When the period of speculation was over, the great amount of surplus capacity for manufacture and the large amounts of stored products on hand made it, of course, almost or quite impossible for distillers who did not practise frauds on the revenue to continue in business. The high taxes, however, led to such frauds that whiskey often sold in the market for less than the amount of the tax. Another factor that contributed to the general depression was the lessened demand for alcohol for use in the arts and manu facture. With alcohol at 30 or 40 cents a gallon, it was used in large quantities for the manufacture of burning fluid, varnishes, furniture polish, perfumeries, patent medicines, even as fuel for cooking, etc.; the United States revenue commission estimating that in 1860 not less than 25,000,000 gallons of proof spirits were so used. When the tax was $1.50 and $2.00, or even 50 cents, as it was from 1868 to 1872, spirits, of course, became too expensive for such purposes. As the tax has been still higher since that date (70 cents till 1875, and 90 cents since that time), no increased demand for such purposes has been felt. These causes, including the large amounts fraudulently manufactured in the earlier years of the high taxes, had tended to keep the distilling business in a comparatively depressed condition after the speculative period following the war had passed. Even as early as 1870 or 1871 the distillers felt themselves compelled to enter into an agreement to limit their distilleries to two-fifths production; and all north of the Ohio, with two or three exceptions, made such an agreement. No very decisive effect, however, was produced by this arrangement. The facilities for manufacturing adapted themselves gradually to the demand; and, on account of our cheap grain, a fair export trade was growing up that relieved the situation somewhat. But in the years from 1878 to 1882, on account of successive crop failures in Europe, a very heavy export demand at paying prices sprang up. In 1879, 1880, and 1881, nearly 16,000,000 gallons a year were exported. To meet this demand many new distilleries, including some of the largest in the country, were built, while the old ones, of course, were run at full capacity. After 1880, good crops in Europe, poor crops at home, with some changes in the tariff laws of leading European countries, especially discriminating duties against the United States, cut off this demand, and left 1 Report of the Commissioner of Internal Revenue, 1888. the distilleries of this country with a capacity sufficient to produce four times what the home market needed.1 Of course, there was, at first, great over-production, and consequent distress among distillers. They could not export except at a loss; their cattle were in the barns (the feeding of cattle on the slop from the distilleries is one important adjunct to the distilling business), so that it was difficult to close the distilleries; their warehouses were filled with goods, and the market was broken. Something must be done. Some said: Let this go on and let the fittest survive. Our experience was that a distiller would keep on until all his own money and all he could borrow was gone, and when he was used up there was another man ready to step in his shoes. In November, 1881, a general meeting was called to form a pool. Prices were really below the cost of manufacture in many places, and the only remedy seemed to be to limit the output, and to export the surplus, even at losing prices. The "Western Export Association" was formed, the officers of which were authorized to levy a monthly assessment on each distiller runhing his distillery. This assessment was to be proportionate to the amount of grain used in manufacture, and high enough to pay the losses arising from the exportation of a quantity of spirits sufficient to relieve the home market. An appeal was made to Congress, asking that an export bounty be given equal to that granted by Germany; or, if a bounty for export should not be given for fear of lessening the revenue, that the internal revenue tax be raised to $1.00 and then a bounty of 10 cents for export be granted. Congress and 1 In the references to the trade, especially the exports, all the manufacturers of whiskey have so far been considered. As the whiskey pools have mostly concerned only one branch of the business, and as the trust is limited to this branch, i.e. the manufacturers of a product for immediate use, it is worth while to call attention to the distinction. One class of producers, especially those in Kentucky, manufacture 'Kentucky whiskey," technically so called, i.e. a product that needs to be stored for some time (from two to five or more years) before it is in good condition for use (J. M. Atherton: Testimony before Committee on Manufacture, p. 3); the other class of distillers, located mostly north of the Ohio river, manufacture alcohol, pure neutral or cologne spirits, etc., a product that is fit for immediate use. 2 Letter from H. B. Miller, former president of the pool. |