There was a time when the United States government ran on hooch. Hard up for cash, taxes on whiskey and beer funded the Civil War. With 40 percent of government revenues coming from liquor taxes, alcohol made the dramatic post-war expansion of government possible so that by the 20th Century, the Federal government would have been unrecognizable in scope and function to a man of the 1800s, but would have been all too familiar to us.
During the same period that the government was being unrecognizably reshaped, the major cities were being transformed by a tremendous immigration boom. Immigration had made it possible for the Union to win the war by providing an endless supply of fresh bodies to throw into the fight. German, Irish and Jewish immigrants came by the hundreds of thousands and made the Union victory possible.
Republican Progressives had looked forward to freeing the slaves, but were far less enthusiastic about filling the country with Catholics and Jews, who were not only bound for Democratic precincts, but did not share their faith. Progressive reformers cast an uneasy eye on the slums and the Democratic political machines that ran them and pursued a grab bag of strategies for curing their ills, from birth control to temperance to socialism.
The progressive vision of a New America was being funded by liquor taxes, but a combination of bigotry and health-nuttery, which was another of the elements of the modern country taking off, brought quite a few reformers around to temperance. Associating Catholics with liquor, they went after liquor itself. But liquor could not be outlawed, without also outlawing big government.
For the practical politician the link between liquor and big government was a web that should not be touched. The drinking American was making big government possible and should be left to drink in peace. But progressive reformers are ever deaf to such logic and quick to cut Gordian knots. Faced with a liquor revenue problem, they contrived a solution in the form of the personal income tax.
The personal income tax was unconstitutional, but with the end of the post-Civil War era and the revival of the Democratic Party as a progressive political movement, the country had entered a period where the Constitution meant very little. During the Wilson and Roosevelt administrations, that document, then not very much more than a century old, had come to be regarded as an outmoded work with very little relevance to modern times.
The Anti-Saloon League, rising out of the mists of an uncertain time, had assembled a coalition encompassing Klansmen, Suffragists, Socialists and Preachers focused on a single-minded agenda, but pushing whatever laws it had to along the way to reach its goal. And the road to Prohibition lay through such policy territories as the personal income tax.
Prohibition today is remembered mainly for the quaint scenes of smugglers and lawmen chasing each other on dark roads, speakeasies where liquor made in massive illegal stills was served, and the end of national integrity as an age of national hypocrisy was ushered in by wet politicians who voted dry. But Prohibition as a phenomenon matters little compared to the ways in which the campaign to achieve it and then hold on to it transformed the country.
Before the income tax, the progressive expansion of government had been built on a hypocrisy that reformers had denounced. A better world was being built with whiskey money, some of it, though far from all of it, coming out of the slums where the new immigrants worked and died. Afterward all that whiskey money went to a mob built out of the worst elements of the slums while the government fattened itself on a new source of tax revenue.
But the income tax was not nearly enough. The Federal government had been running shocking deficits in the 1930s. The budget deficit hit $903,000,000 in 1931, and then more than doubled in 1932 to $2,472,000,000. A 2.4 billion dollar budget deficit might not attract much attention today, but that same year revenues stood at only 1.9 billion dollars making the deficit larger than the revenues. A comparable budget deficit today would not be our usual trillion dollar booms, but something in the range of three trillion dollars.
With the Great Depression underway and the ultimate progressive Democrat with a big government agenda in the White House, the liquor taxes were sorely missed. Republicans lost 100 seats in the 1932 congressional election and with FDR in the White House, it was time to put an end to Prohibition and put all the lost revenue from liquor sales to work funding the New Deal.
By 1935, revenues had jumped to 3.6 billion dollars, nearly double what they had been only a few years earlier, but the budget deficit had gone up to 2.8 billion dollars because spending had surpassed 6 billion dollars reaching nearly 10 percent of the country's Gross Domestic Product. It would eventually reach 24 percent of GDP, a figure only matched by another Democrat. Obama.
Roosevelt's New Deal had drunk deeply of liquor taxes, but kept spending money like a drunken sailor, and even with the income tax and legal liquor sales, and a variety of other revenue raising gimmicks, the government had dug itself into a deeper fiscal hole than ever.
Social Security was born two years after the end of Prohibition. One of the creators of Social Security was Senator Pat Harrison of the Cullen-Harrison Act which legalized the sale of low alcoholic beer as a trial balloon for ending Prohibition. What had been thought a sin by progressive Unionists had become the salvation of progressive New Dealers who were less interested in moral reform and more interested in building the institutions that would give them permanent political power. And if those institutions had to run through the saloon, so be it.
The expanding government had gotten a heady taste of how good steady revenues from sin taxes could taste, and from that day on it was hardly ever sober again, imbibing greater and greater quantities of the stuff. One tax led to another and then another. The more the tax revenues rolled in, the faster they were spent on creating and funding the bigger and bigger institutions of the perpetually expanding system of infinite progressive government.
Prohibition proved to be less about morals than about economics and the ways that governments try to make the unworkable policy keep on going just a little longer. That could be taken as a reference to the prohibition of liquor, but it applies equally well to the economic infrastructure of tax and spend policies. Prohibition had less to do with morals than it did with political power, immigration and taxation.
Prohibition became a reminder that modern technology and techniques were ultimately no match for the will of the people. It was the first real destructive test of the modern government's abilities and it failed socially and economically, forcing the government to go wet to finance its own operations.
Prohibition is long gone but the consequences of it, including the cat and mouse game between organized crime and national law enforcement, the personal income tax and the budget deficit, the pressure group that forces the will of the minority on the majority and the promise that the government can perfect the men it rules over and the national orgy of hypocrisy that follows are still with us today.
With the end of Prohibition, the State accepted the idea that it had to corrupt in order to uplift, damn in order to save and do evil in order to do good. It had to become truly corrupt to be truly moral in the service of the greater good.