Prohibition, Profits, and Power: Rise of the Gangster Entrepreneur
On (Booze) Startups, Old/New Money, and the Decline of the WASP Establishment
Since Gatsby has garnered a lot of interest lately, I’m going to republish an essay I wrote for American Business History during my junior spring at Wharton. On (booze) startups, the clash of old and new money, and the decline of the WASP establishment (similar to today’s rise of Silicon Valley—but more on that later).
Introduction
On January 16, 1920, people across America rejoiced. Some celebrated as if it were their last time. In Manhattan, a wealthy patron rented out the Park Avenue Hotel for a society party. Black cloth cascaded from the walls. Black linen covered black tables, upon which black caviar was served to guests dressed in black. Socialites somberly toasted away the night in black champagne flutes designed just for the occasion. Dapper dandies dabbed at their eyes with black pocket handkerchiefs. Funeral dirges filtered above the party. At the center of the ballroom sat the guest of honor: a black coffin filled with black bottles. At midnight, the guests filed past the casket to bid goodbye to alcohol: Prohibition had begun.
Others celebrated the beginning of Prohibition as if it were their first time. Renowned evangelist Billy Sunday shouted to a roaring crowd in Norfolk, Virginia, “The reign of tears is over. The slums will soon only be a memory. We will turn our prisons into factories and our jails into storehouses and corncribs. Men will walk upright now, women will smile, and the children will laugh. Hell will forever be for rent.” Sunday’s proclamations rang as sincerely as his declarations for the second coming of Jesus. With the enactment of national Prohibition through the Volstead Act, America would be free from its former shackles, revitalized and resurrected. The Anti-Saloon League shared similar sentiments, stating in a victorious press release, “At one minute past midnight tomorrow a new nation will be born.”
Indeed, a new America would be born. At that very moment of chaos, would-be enterprising visionaries gazed critically at their country. They looked at the thousands of miles of coastal shoreline and saw openings to thousands of distribution channels. They read in the papers about the paltry $2.1 million allocated to federal enforcement of the Volstead Act and spotted underpaid officers as ready allies. They realized that human nature was immutable in its unquenchable thirst and recognized the enormous profits to be made. They envisioned the golden opportunities radiating from this new America and raced to seize them. Within hours of the beginning of Prohibition, the smuggling and distribution of liquor into the United States began. While it started on a small scale, it would eventually balloon into an industrial-level operation. The new America would not grow up to become the temperate daughter of the prohibitionists, but the cunning bastard of syndicated crime.
As it turned out, the Manhattan funeral farewell for alcohol spoke too soon. By the mid-twenties, the New York social scene was again awash in booze. Only this time, the liquor was supplied by the newly-arrived “rum barons” in the newly-built, luxurious nightclubs that they owned. Socialites, Vaudeville stars, celebrity singers, journalists, politicians, and gangster entrepreneurs mixed and mingled, popping champagne at private tables. Glamor exuded from a scene dominated by illicit drinks, an exclusive guest list, and an unmistakable air of danger. No one doubted as to who held the money and power. As New York’s mayor Jimmy Walker put it, “It was a time when a prominent debutante could meet a gangster in a night club and feel that she was the privileged one.” With the opportunities opened up by Prohibition, the successful gangster entrepreneurs had amassed enormous fortunes and mixed into the blue-blooded ranks of New York society.
Prohibition ushered in change, promising a new era. As always, with change came enormous opportunities for risk-takers to seize and create wealth. Those who were ambitious and entrepreneurially-minded rose up to the challenge. They blazed new trails, leaving new industries and fortunes in their wake. Prohibition gave birth not only to the bootlegger class, but also to gangster capitalism and modern organized crime. In the broad sense of entrepreneurship, the Prohibition bootlegger was a value creator, exploiting environmental change and responding innovatively to business operation challenges to capitalize on profits.
History of the Birth of Prohibition
Prohibition blew the winds of change that would transform into a tornado of opportunity for its gangster entrepreneurs. However, it is paramount to understand Prohibition’s origins before analyzing how its opportunities would later be exploited. This section will discuss the history of the birth of Prohibition. Prohibition’s history is steeped in irony. The Eighteenth Amendment’s supporters hoped for a new era, deciding that the abolition of alcohol would save the nation from the lazy, foreign immigrants who threatened its economic prosperity. The supporters received their new era, but ironically: rather than fulfilling their sweetest dreams, Prohibition paved the way for their worst nightmares.
In many ways, the call for Prohibition was a xenophobic crusade undertaken by the WASP establishment against the new wave of ethnic immigrants. The rapid industrialization and urbanization in the latter half of the nineteenth century made sweeping changes in almost every aspect of American life. Additionally, there was a large-scale influx of immigration. Stephen Fox writes, “Immigration from abroad, in its ethnic diversity, challenged the easy domination by the British-descended Protestants who had…run things for two centuries.” To many old-stock Americans, the waves of change were deeply unsettling. Beyond the disturbing changes in technology and industry, the foreign immigrants made an easy scapegoat for WASP insecurities.
In order to assert their control over the foreign newcomers, WASPs supported Prohibition. Fox writes, “WASPs supported Prohibition while non-WASPs opposed it…Prohibition therefore amounted to an ethnic experiment in social control.” The Anti-Saloon League, the major lobby for Prohibition, argued in their printed journal that Prohibition was necessary “to preserve this nation and the Anglo-Saxon type.” Similarly, Congregational minister William H. Hess asked his WASP members, “Is it not about time for the real Americans to drive the low-down, grafting, Irish-Catholic rum-sellers and ‘rummies’ out of city politics?” Although what really scared the prohibitionists were the threats of diversity and modernization, it was easy for them to blame everything on what seemed to be tied deeply together: crime, political corruption, saloons, and foreigners.
To add scientific legitimacy to their crusade against alcohol, supporters of Prohibition expounded on the idea that a dry America would be a productive America. Larry Engelmann writes, “[T]he economic argument contended that alcohol made the working man, whether laborer or manager, inefficient and careless…New “scientific” studies…were presented as conclusive evidence that the consumption of alcohol led to inefficiency in any endeavor.” This appealed to many captains of industry, including Henry Ford. In an interview with Ladies Home Journal, Ford said, “It was not necessary to ask a man whether or not he drank. He always stood out among his fellows who did not drink—he never did his work so well.” Ford took his anti-alcohol stance so seriously that he established a sociological department within the Ford Motor Company to monitor the behaviors of its workers. If they were caught drinking, they would not qualify for the coveted five-dollar-a-day wage. Spurred by their business leaders, many moderate Americans believed in the efficiency argument, finding a scientific rationalization for Prohibition.
Of course, it was convenient that the workers deemed “inefficient” happened to be the same foreign immigrants despised by the xenophobes. Members of the WASP establishment, including the Rockefellers and Du Ponts, bankrolled the campaign for Prohibition, in order to “tighten the yoke on the newer ethnic [workers].” If the WASP robber barons of the day could enable their foreign employees to have higher efficiency while restricting them to laborer positions, this would keep the financial and industrial establishment well within WASP control. From this analysis, it is clear that the efficiency argument provided the “scientific” evidence to support an underlying xenophobia.
The WASP supporters of Prohibition asked for a new era, and they received it. However, the new age did not give them the desired results. In fact, their efforts backfired. Ironically, Prohibition opened doorways for those ethnic, newly-immigrated Americans to obtain financial success and provide a substantial challenge to the WASP establishment. Moreover, far from increasing production through sober workers, Prohibition deprived the economy of a legal market. It created a black market and decreased overall production. It is on this ironic note that one begins to examine Prohibition’s entrepreneurial possibilities.
The Gangster Entrepreneurs
In order to understand the Prohibition gangster as entrepreneur, it is crucial to understand the background from which he (and at the industrial level, the boss was almost always a he) came. This section will first discuss the concept of the “gangster capitalist.” Then, it will paint a fuller picture of these entrepreneurs by analyzing from where they emerged and from what spurred their motivations to choose bootlegging above all other career opportunities.
Some may question the idea of Prohibition turning criminals into capitalists. Traditionally, one does not associate crime with business opportunities or gangsters with entrepreneurs. It is an uncomfortable idea, as the gangster operates outside of the same law that protects property rights. However, Jean Baptiste Say, the French economist most commonly credited with popularizing the term “entrepreneur,” writes, “The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” Management scholar Peter Drucker expands on this definition, “The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” From this broad standpoint, the Prohibition bootlegger certainly qualified as a change-seeking exploiter of opportunities.
An overview of the existing literature suggests that criminal entrepreneurs have sought to fulfill demand in areas not covered by the law. Criminal scholar Petter Gottschalk writes, “[O]rganized crime is often entrepreneurial in character and…entrepreneurship is often the basis for illegal businesses.” As with any entrepreneurial call to action, criminal entrepreneurship is spurred by capitalizing on an unfilled demand hindered by existing legal structures. Curtis J. Milhaupt and Mark D. West found, “Organized crime…is the dark side of private ordering – an entrepreneurial response to inefficiencies…[created] by the state.” The gangster capitalists of the 1920s fulfilled this role. The law prohibited the legal distribution and sale of alcoholic beverages, even as there was an enormous consumer demand. From an economic perspective, the bootleggers were simply filling the economic inefficiencies created by the state. Without a free market, they created a black market.
Despite the open opportunities created by Prohibition, an analysis of the most successful gangster entrepreneurs of the Jazz Age shows that they shared similar backgrounds. Al Capone, Meyer Lansky, Waxey Gordon, Frank Costello, and Charlie Luciano represented some of the biggest names in bootlegging by the mid-twenties. All were born to poor immigrant families at the turn of the century. All were young men in their twenties at the onset of Prohibition. None of them fit the WASP profile, as they were either Italian or Jewish. None stayed in school or stuck with traditional paths, instead opting for the world of teenage street gangs. All boasted rags-to-riches stories, magicking fortunes out of thin air with the opportunities of Prohibition.
It is not a coincidence that the cream of the bootlegger class shared such similar characteristics. Consider the fact that the bootleggers were born to newly-arrived, ethnic immigrant parents. Although Prohibition ostensibly created open opportunities which anyone could seize, only the immigrants rose up to the challenge at an industrial level. Stephen Fox writes, “The WASP population contributed a few bootleggers…but as the 1920s wore on…non-WASP ethnic groups provided the most significant bootleggers.” At first glance, this may seem strange, as crime was nothing if not an equal-opportunity employer. Yet, a detailed analysis of the social history and context explain the emergence of this situation.
On one hand, these first-generation Americans came from poor backgrounds, imbuing them with the hunger and desperation to get ahead as criminal entrepreneurs. From an economic standpoint, their low-income backgrounds suggest that they would be attracted to the easy money and profits that Prohibition promised. In 1933, the New York Times looked back and wrote, “What golden opportunities of the prohibition era could do for a man without scruples and anxious to get ahead!” The extent of these profits will be discussed in further detail in the next section. Indeed, for these ambitious young men, desperate to “make it” out of the slums, the enormous profits created by the black market comprised part of the bootlegging allure.
However, easy money did not cover the entire explanation. After all, bootlegging was a dangerous business, built on a flowing foundation of sweat, tears, and blood. Many gangsters would pay with their lives. From a risk standpoint, no better alternatives must have been available to these ambitious young men. As discussed previously, large-scale discrimination existed against the newly arrived ethnic Jews and Italians. Roger Chapman writes, “During the early 1900s, American Jews experienced many forms of discrimination. Jewish high school students were often outstanding academically, but elite universities enforced quotas that excluded many qualified Jewish entrants.” These young men experienced wholesale rejection by the establishment. Steven Usdin writes, “The large [white-shoe] corporations openly practiced discrimination against Jews.” For these young men, the traditional route of attending an academically elite college and then obtaining success in a socially elite profession was simply improbable. In Frank Costello’s own words, “Other kids are brought up nice and sent to Harvard and Yale. Me? I was brought up like a mushroom.” Unlike young WASP men who had routes to success within the establishment, the bootlegging criminal entrepreneurs had to look for opportunities outside the establishment.
While it is easy to take it for granted, it is also interesting to note that all of the leading, industrial-level bootleggers were male. This was the case, despite that female bootleggers existed in large quantities at lower levels. Tanya Marie Sanchez writes, “Women bootlegged to such an extent that a lack of female arrestees in any given month was considered newsworthy.” However, these women rarely occupied leadership positions. Instead, they worked for either the big-name bootleggers or operated as small-scale independents. For instance, the Genna brothers paid Sicilian women $15 per day (ten times of what they would have earned at hard labor) to distill fifty gallons of corn-sugar booze. If not working for a prominent male bootlegger boss, the female bootleggers worked as small, independent operators. Sanchez writes, “For working-class mothers, bootlegging was both a convenient and lucrative method of supplementing meager family incomes.” The lack of women in leadership positions can be explained partially through the expectations for women at the time: to help from the home, by making alcoholic beverages on the kitchen still. Additionally, it is likely that women were less interested in the physical dangers that entailed the life of a bootlegger boss: shootouts and murder.
Lastly, it is important to note that the big bootleggers all came to age at the right time. At the dawn of Prohibition, these men were in their early twenties. This timing should not be ignored. Mark Casson writes, “Entrepreneurial success depends on a variety of related factors…[including] timing.” These men were able to embrace the opportunities opened by Prohibition at the dawn of their lives. As men in their early twenties, they were less risk-adverse and able to devote the work hours that their fledgling startups required. This is supported in the academic literature. S. Ashok Kumar writes, “The age of the entrepreneur at the time of starting the enterprise will be a good indicator for the success of the entrepreneur. Generally, it can be seen that a person who started the enterprise at a young age is successful.” Kumar’s statistical research shows that 60% of established entrepreneurs started their enterprise before age 30. The kings of bootlegging confirm this research. They held the gift of timing, reaching the optimal entrepreneurial age just at the start of the Prohibition gold rush.
Gangster Capitalism in Practice
The previous sections have discussed the socio-historical context for change and the general profiles of the entrepreneurial agents. With the background covered, one can now analyze how the gangster capitalists were able to operate in practice. The most successful criminal entrepreneurs managed their enterprises as corporations. They achieved vertical integration and enhanced profit margins by simultaneously engaging in wholesale procurement, distribution, and retailing. They devoted considerable resources on risk management and created pipelines for human resource management. They devised innovative ways to raise venture capital. They employed various pricing and branding strategies to market their products. Overall, the bootlegging industry followed the typical industry lifecycle through introduction, growth, maturity, and decline stages. The Prohibition bootlegger was a value creator who captured profits by responding to various business operational challenges with innovation.
For large-scale bootleg industrialists, the first operational order of concern was procurement. Wholesale procurement was achieved in three major ways: smuggling, distilling, and conversion.
Smugglers transported alcohol from abroad into the country. They primarily sourced alcohol either across the Canadian border or from Europe through the Eastern seaboard. Smuggling alcohol from Canada to the United States was a large-scale business executed by professional operations. Allan Everest writes, “The United States was by far Canada’s largest customer for alcoholic goods, more than 80% of Canada’s exports going south of the border.” Professional smugglers operated by land, air, and water. On land, they ran fleets of hundreds of speedy Cadillacs, capable of carrying 40 cases of liquor each. They established intelligence networks by employing young boys to watch the customs house and follow the positions of patrol officers. They hired telephone operators to relay information on the whereabouts of enforcement officers.More often than not, they resorted to bribery. Bribery occurred to such an extent that “on some days…police patrols had to be canceled because all officers called in sick.” Large-scale smugglers also transported their goods by train. Thousands of railroad cars crossed from Canada into Detroit daily, carrying millions of gallons of hard liquor hidden beneath cargoes of grain, wood, and Christmas trees, or under bogus seals altogether. Smuggling syndicates also operated by plane. One outfit flew an estimated $100,000 worth of liquor across the border each month Finally, boats transported a significant proportion of the liquor across the border, crossing Lakes Erie and Champlain into Detroit and down to Chicago and New York. Many crossings were illegal: smugglers purchased fleets of high-speed boats that could easily outrun the police patrols. However, some crossings were “legal.” By 1925, Canadian bootlegger Hiram Walker annually claimed the southern shipment of one hundred thousand cases of Canadian whiskey to “Cuba.” Canada proved itself to be a major boon for liquor smugglers.
The Eastern seaboard also provided many opportunities for industrial-level bootlegging. Gangster entrepreneurs coordinated with rum ships that set sail from Cuba, the British Honduras, and the Bahamas. While some of these ships sailed under foreign flags, many were owned by the same American gangster entrepreneurs whose boats went out to greet them.As Kenneth Rose writes, “Large, ocean-going vessels were loaded with cases of liquor…being careful to stay in international waters…small boats would then come out to pick up the liquor and bring it back to shore.” Day or night, rain or shine, the fast, small boats were able to evade enforcement patrols and transport the liquor to American ports. These operations were conducted at such a large scale that the Bahamian governor announced, “The prosperity of the Colony today is attributed entirely to the revenue derived from liquor smuggled into the United States.” Industrial bootleggers took full advantage of the vast American coastline to further their trade.
The procurement process was not only limited to smuggling from abroad. Bootleggers also engaged in large-scale domestic distilling operations. In Chicago, the Genna brothers hired hundreds of Italian families to produce liquor in their residences. Each family distilled around 350 gallons of alcohol a week, which the Gennas sold wholesale for $6 a gallon. Soon, the operation raked in $350,000 a month in profit. In New York, big-time bootlegger Bill Dwyer owned the Phoenix Cereal Beverage Company on Tenth Avenue. Thinly disguised as a “breakfast-cereal factory,” the Phoenix converted thousands of tons of cereal grain into beer. Dwyer won the support of both citizens and the NYPD with his newly accrued social and financial capital as a leading criminal entrepreneur. James Fentress writes, “Several times the police learned of impending raids by federal agencies…[the chief] would order out his squad cars…to arrest the dry agents…as ‘suspicious-looking persons.” Domestic operations played a key role in alcohol procurement.
The conversion of legal industrial grade alcohol occupied the remaining portion of large-scale procurement. Prohibition still allowed for the legal production of industrial grade alcohol for other products. Enterprising minds quickly realized that industrial grade alcohol could also be diverted and engineered into drinkable alcohol. Andrew Sinclair writes, “Between 1920 and 1930, legitimate production of industrial alcohol increased nearly four times.” Bootleggers first started legitimate businesses, such as the manufacture of hair tonic. After producing the required industrial grade alcohol, they added water, burnt sugar, and flavoring to manufacture low-quality whiskey and gin. One barrel of industrial alcohol could make two barrels of whiskey. In 1925, John J. Horgan estimated, “75 per cent of the bootleg liquor comes from the improper diversion of industrial alcohol from legitimate into illegitimate channels.” When the government ordered the poisoning of industrial-grade alcohols, bootleggers promptly responded by hiring chemists to renature the alcohol into a drinkable form. Bootleggers rose to the challenge of procurement with innovation.
Distribution comprised the second operational order of concern for gangster industrialists. After procurement, the next step was distributing the alcohol to retail points of sale. Often, the same gangsters engaged in procurement also owned distribution enterprises, the next point in the value chain. To distribute their illicit goods, bootleggers bought trucks in large quantities. James Fentress writes, “[B]ootleggers were the pioneers of American interstate trucking…Truck and boat dealers sold their products freely to bootleggers and, if they had any sense, did not ask too many questions.” In Boston, gangster Dan Carroll’s trucks met his bootleg shipments as they came ashore at night, bringing the booze to warehouses. From the warehouses, the alcohol was then trucked to other points of distribution. The bootleggers quickly built a large distribution network.
The gangster capitalists often owned the retail points of sale as well, moving further down the value chain to enhance profit margins and efficiency. As James Fentress writes, “Bootleggers started by buying trucks and supplying resorts with booze; they ended up buying trucking companies and owning the resorts themselves.” The retail points of sale were numerous and diverse, ranging from nightclubs to brothels to casinos to restaurants to drugstores to synagogues. In New York alone, the number of illegal points of sale was estimated as somewhere between 32,000 and 100,000. The bootleggers’ sphere of influence extended almost everywhere.
Many bootleggers either founded or bought stakes in nightclubs. At first, bootleggers entered the business on a modest scale, bankrolling dives and small speakeasies. But as they prospered, they invested in high-end nightclubs. Soon, ladies and gentlemen drank Owney Madden booze in Owney Madden-owned clubs. Racketeer Larry Fay opened a series of New York nightclubs: El Fey, Del Fey, and Fay’s Follies. There, patrons could enjoy Fay champagne for $20 a bottle. Beyond padding gangsters’ pockets with the enhanced profits of vertical integration, the nightclubs also served valuable marketing and branding functions. Stephen Fox writes, “In strictly business terms, nightclubs were a riskier investment than just selling booze…but the night clubs gave their gangster owners…respectability…[they] could come out in public, be recognized, say hello to famous people.” This increased their brand equity among patrons, allowing them to charge an even higher premium. After a night in Larry Fay’s club, a patron said, “It was $1,300 for the evening…but I was glad to pay it…I had a hell of a good time.” The ungodly amounts of money spent drinking bootleg liquor were worth it to patrons who sought a glamorous party experience.
Additionally, brothels and casinos provided gangsters with synergies and a strategic fit for their alcohol retailing operations. Prostitution and gambling also rested within the folds of the illegal underworld. Already familiar enterprises to the seasoned criminal entrepreneur, they provided natural steps for expansion. As Melissa Hope Ditmore writes, “Prohibition linked prostitution and alcohol in brothels as places where leisure activities that shared criminal status occurred.” Moreover, casinos and brothels provided excellent sites of entertainment where the syndicates could cross-sell all of their illicit products: games, girls, and gin. Celebrated gangster Al Capone integrated his bootlegging operation with brothels and casinos as his retail points of sale. Laurence Bergreen writes, “The entire group of Capone-controlled brothels in the Cicero area took in $4 million [in profits] annually.” Brothels and casinos provided criminal entrepreneurs with additional ways to expand their enterprises.
Bootleggers also expanded downstream into the “drugstore” business. Under Prohibition, medicinal alcohol was allowed. Doctors could prescribe and druggists could dispense alcohol. Alcoholic liquors sold by physicians and hospitals promptly increased by 400%. Gangsters quickly realized that drugstores could provide a profitable front for their operations. Daniel Okrent writes, “[T]he cash flow from few enterprises gushed with quite the velocity that Prohibition brought to the drugstore business.” Notorious New York bootlegger Sherman Billingsley migrated down the value chain by buying majority interests in drugstores in the Bronx, Brooklyn, and Manhattan. Participants in the drugstore bootlegging business included Charles Walgreen, founder of Walgreens. Even Jay Gatsby, America’s most famous fictional bootlegger, was described by F. Scott Fitzgerald as a drugstore owner. “Drugstore” entrepreneurs maintained a conventional storefront and installed “pharmacists” for show, but the main business was providing a retail front from which to sell their bootlegged alcohol.
No loophole was left untouched as the bootleggers seized downstream opportunities within the “sacramental wine” industry. Under Prohibition, religious wine was permitted to be procured and distributed. The demand for sacramental wines increased by 800,000 gallons during the first two years of Prohibition. Jewish bootleggers quickly learned how to take advantage of their ethnic heritage. Prominent New York gangsters set up the Menorah Wine Company as a front to import and sell 750,000 gallons of fortified wine with a forged Bureau of Prohibition permit. Other bootleggers owned dozens of “wine stores,” where a hired “rabbi” at the counter would sign up customers to join a “synagogue” at the same time they came to pick up the goods. Soon, there were “rabbis” who dealt sacramental champagne, sacramental brandy, sacramental crème de menthe, and various other liquors that were unrelated to any aspect of Judaism. As the Los Angeles Times described the situation, these were “men professing to be rabbis but who in reality were bootleggers.” Even the religious industry was not out of the reach of the ubiquitous bootleggers.
As savvy entrepreneurs engaged in a volatile business, the gangsters spent a considerable amount of their income on risk management. In plain language, risk management to ensure smooth business operations translated into the wholesale bribery of government officials. Bribery was rampant, as prohibition agents were grossly underpaid and earned less than garbage collectors. An estimated 10% of bootleggers’ revenues went straight to payoffs. Even when the bootleggers were arrested, they were rarely convicted. With the influx of bribes, case “fixing” became common. Michael Woodiwiss writes, “There were thousands of arrests but when protected bootleggers stepped in front of judges, district attorneys suddenly found that they had ‘insufficient evidence,’ witnesses failed to turn up, or police officers admitted that they had overstepped themselves in the performance of their duties.” This type of bribery extended all the way up to the United States attorney general. Attorney general Harry Daugherty was later found to have been on the payroll of George Remus, one of the nation’s most powerful bootleggers. Daugherty earned $350,000 a year to keep the booze flowing. From the bootleggers’ point of view, bribery was a necessary risk management tool to ensure their survival.
The bootleggers also deliberated the best ways to recruit, train, and employ their human capital. Bootlegging was a labor-intensive business, so human resource management was an important consideration. Gangster bosses needed workers to navigate speedboats, unload goods, drive trucks, and wait tables. They also needed trusted skilled executives to manage operations. Bosses recruited from the ethnic street gangs from which they had once graduated. They often installed their new recruits on the other side as federal prohibition agents. There, the recruits would expose themselves to both sides of the business, prove their trustworthiness, and ease business operations. As a result, one in twelve dry agents was dismissed on conspiracy charges. James Fentress writes, “The extensive turnover in dry agents led critics to claim that the Bureau was nothing but a training school for bootleggers.” After their training period, the newly minted bootleggers could begin managing small parts of the business and climbing up the criminal corporate ladder. This bureaucratic organizational structure further cemented the parallels between the criminal entrepreneurs and their legal counterparts.
Financing presented another challenge for gangster entrepreneurs as they had to obtain venture capital for their illegal businesses. Unlike legal businessmen, gangsters could not walk into a bank to obtain a loan. Nonetheless, alternatives existed. Arnold Rothstein was a classic gangster middleman, described as New York’s “Big Bankroll” of crime. Michael Woodiwiss writes, “[Rothstein] had been among the first to spot the potential profitability…by sponsorship of businesses…he even bankrolled the operations of Jack ‘Legs’ Diamond, who preferred hijacking the contraband of bootleggers rather than troubling with the complex operations required to import, transport, and distribute the illegal liquor.” Rothstein played the role of venture capitalist, by providing both financial capital and political connections to his entrepreneurs. He knew everyone in the industry and gave his gangster entrepreneurs the tools they needed to succeed. Stephen Fox writes, “The mobsters hated him, but…they had to go to him. He had something to do with every speakeasy.” Even within the space of financing, a shadow capital system sprung up to support the criminal entrepreneurs.
Bootleggers developed innovative marketing strategies to promote their products while maximizing profits. Notably, they employed price discrimination tactics to signal varying levels of quality to the consumer, when there was none. A former employee of the Bronfman bootlegging family remarked, “The booze was good enough, but it all came out of the same barrel, even if it had half a dozen different labels.” These price discrimination tactics ensured that the Bronfmans would maximize profits from each type of customer, assuming that each consumer chose the best label that he or she could afford. Although unethical, price discrimination has long been employed by entrepreneurs as a profit-maximizing strategy. This only highlights another way in which the bootleggers acted like capitalists.
Additionally, bootleggers were also some of the first businessmen to practice product placement in order to cultivate attractive product perceptions. As discussed previously, bootleggers built high-end nightclubs and attracted a socially elite crowd to enhance their brand equity. However, they quickly went beyond that by creating the marketing concept of strategic product placement in movies. Andrew Barr writes, “[Gangsters] helped establish drinking as sophisticated and urbane. In 1930, one survey found that three out of four Hollywood films referred to drinking in some way. The hero drank in two out of every five films and the heroine drank in one out of five. The villain, by contrast, only drank in one out of ten films.” This does not come as a surprise, when one considers that many Hollywood films were financed by bootleggers. Gerald Horne writes, “Mobsters were silent partners of the movie moguls…the bankrolling of Harry Cohn and Columbia Pictures by Longy Zwillman was well known, as were his business dealings with Joseph Schenck of MGM.” This marketing strategy worked well and successfully glamorized drinking.
Overall, the bootlegging industry followed the typical business industry lifecycle. At the onset of Prohibition, the industry was in the introduction phase, with only a few small-scale players. In the early-twenties, new entrants swamped the market and the competition for profits intensified. By the mid-twenties, the industry hit maturity as individual bootleggers consolidated and merged into larger gangs. Stephen Fox writes, “As elsewhere, the many independent…bootleggers were gradually consolidated through murders and mergers into fewer, larger gangs. A predictable phase in the history of any American enterprise, by the late 1920s this winnowing had produced five…gangs in New York.” Consolidation in the bootlegging industry mimicked the consolidation experienced by other industries. The mergers ensured industrial-scale operations and economies of scale, which created barriers to entry and announced the arrival of Big Bootleg. As the repeal of Prohibition closed on the horizon, the bootlegging industry entered the last industry lifecycle stage: decline.
However, by the late-twenties, the remaining bootleggers had become seasoned entrepreneurs. For a decade, they had navigated the various business challenges that the tough industry had thrown at them. They had become excellent chief executives. Cognizant of the coming end of Prohibition, they harvested their existing operations while looking for exit opportunities. Thomas Ainlay writes, “As Prohibition was repealed and revenues from bootlegging dried up, crime syndicates saw ownership of casinos as a new cash cow.” Some former bootleggers, such as Meyer Lansky, went on to found Las Vegas, again straddling the upper and underworlds. Others stayed in the newly-legal liquor business, including Sam Bronfman, who moved his operations to New York. Still others went into public service. Joe Kennedy used his business organization skills and political connections to help his son, John F. Kennedy, win the Presidency. With their learned business expertise, these ex-bootleggers translated their entrepreneurial know-how into a diverse array of new ventures. In every sense of the word, they were value-creators.
Conclusion
Prohibition sowed the seeds for change, opening up fertile new markets. A new era sprouted from the ground up. It dangled enormous opportunities in front of young, ambitious risk-takers who seized the fruits of wealth with both hands. These entrepreneurs engaged in criminal activities at great personal risk to satisfy an ever-thirsty consumer demand. They innovated their way through various business challenges, tackling every roadblock with renewed vigor. They blazed new trails, conducting industrial-scale operations and creating value at every point in the distribution channel. Their efforts paid off, as they gave birth to modern organized crime. Despite the best efforts of the WASP establishment to restrain their success, the ethnic bootleggers of the Roaring Twenties fought their way to the top and shaped the course of American business history. In the words of Al Capone, “This American system of ours, call it Americanism, call it capitalism, call it what you like, gives to each and every one of us a great opportunity if we can only seize it with both hands and make the most of it.” While value-capture and entrepreneurship can take many forms, they always sit on the same foundation. Throughout the ages, imbued in the minds and intuitions of every successful entrepreneur is an implicit understanding that change brings opportunity and fortune favors the bold.
