What Al Capone and Prohibition Can Teach Us About Cannabis Legalization

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The legalization of cannabis is reaching critical-mass, as states continue to decriminalize the sale of recreational and medical cannabis. With so many states joining the cannabis movement, the prospect of federal legalization is – in our view – inevitable. With the tide turning on cannabis, we thought that we might be able to anticipate the future of the cannabis market by finding a corollary from the past.

Fortunately, we have a ready made proxy to help guide our analysis, which is of course the end of alcohol Prohibition in the early 20th Century.

In 1933 Congress repealed the 18th Amendment to the Constitution and ended Prohibition. Interestingly, the government didn’t actually legalize alcohol. They introduced the 21st Amendment instead, which gave the states the ability to decide how to implement alcohol policy.

Essentially, the government got out of the way of states alcohol policies, except where dry states wanted to keep alcohol out, and needed federal aid. If this scenario sounds familiar it is because it is essentially the state of the market for cannabis in 2018.

Under the Obama administration, the US attorneys were largely instructed to defer to each states decision regarding the legalization of cannabis. President Trump’s, Attorneys General, Jeff Sessions, appears to be taking a different tact, although nothing from an enforcement perspective has happened…yet. Attorneys General Sessions has already asked Congress to repeal legislation that prevents his office from prosecuting medical marijuana providers. So far, Congress hasn’t complied.

Quality and Health Regulation

During prohibition there was a great deal of concern around the quality of liquor. Was a clear brown liquid scotch, or industrial alcohol with some food coloring and a pinch of lye for flavor? With legalization came licensing, regulation and health laws. Moonshine quickly lost market share to real distilleries and breweries.

Currently, this regulatory infrastructure is not in place for cannabis because the plant is federally illegal, which leaves it outside the ambit of the U.S. Food and Drug Administration (“FDA”). However, the good news is that if the federal government choose to legalize cannabis, implementing necessary regulations should be relatively straight forward. The reason is because there’s already a similar model of inspection, regulation and taxation in place, because tobacco is also a plant that requires farming, cultivation, regulation, and sale. Therefore, in theory cannabis could be regulated by the FDA and enforced by the department of Alcohol Tobacco and Firearms.

You can read more about the failure of Prohibition to improve public health in this paper from the National Institute of Health (NIH).

 So Long, AL

The end of Prohibition had a devastating impact on organized crime. Over 100,000 speakeasies operated in New York city alone, and nearly all of the speakeasies across the country had ties to organized crime.

The Cato’s Institute’s excellent analysis on the failure of Prohibition includes this chart showing the spike and decline of violence during and after Prohibition.

In addition to the reduction in crime, the end of Prohibition caused the speakeasy owners to become legitimate operators, and with it increased tax revenues and government regulation. History seems to be repeating itself with the cannabis industry. The states that have legalized cannabis have seen a dramatic increase in tax revenues and a corresponding decrease in black market activity and violent crimes.

According to a recent study from New Frontier Data, the U.S. could see up to an additional $132 billion in tax revenue. Contrast that with the $3.6 billion it costs to enforce marijuana prohibition each year. Over 600,000 people were arrested for drug possession last year, and 575,000 of those were for simple marijuana possession last year.

The Legalization Snowball

Finally, here are some things to note about what happened after the introduction of the 21st Amendment.

1933: Prohibition ends. On April 7, the Beer Act is passed, making brewing legal. Over 200 breweries immediately begin operation.

1934: The Wine Institute founded in California, alcohol was legalized in all federal territories (e.g. Panama Canal, Puerto Rico, etc.). Only eighteen states still prohibited alcohol.

1935: The first beer in cans is sold, Alcoholics Anonymous is founded.

1936: Federal government passes the Federal Alcohol Administration Act providing U.S. federal government regulation for alcoholic beverages. Pennsylvania passes an emergency wine and spirits tax to pay for the rebuilding of Jamestown, which to this day generates over $160m in annual revenue.

Within 3 years alcohol went from illicit and unregulated hooch sold in backrooms to a regulated, diverse market sector and tax cash cow. Cannabis is ready to follow the same path, and the only obstruction is federal political direction. The only question is, how long can the federal government hold out?

 

Sylva was not compensated by any of the companies mentioned in this article.

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