Brewing Comes Full Circle in America
From Craft Brewing and Back Again
by Kieran O’Connor (Brewing Techniques - 1996)
This is a three-part article about the growth of craft brewing in America. The first part covers the earliest prominence of beer in the colonies, local breweries, pasteurization, taxation, and tied houses through to the consolidation of the brewing industry up to and culminating with Prohibition.The second part is about the history of craft brewing in America and how it brought brewing out of the dark days of Prohibition up to the modern age of microbreweries, chronicling the demise of small breweries in the face of consolidation. The third and final part covers how craft brewing has reclaimed its place in American brewing history and helped restore beer diversity.
Part I: From Colonial Craft Brewing to the Prohibition Era
hen the first Europeans came to America, the native peoples were already making a type of beer from corn.* The Europeans, however, got straight to work brewing the beers they were used to drinking in their homelands. Many settlers brewed their own beer, some because they wanted to, others because it took too much time and cost too much to import ingredients from Europe for commercial breweries.
More and more commercial breweries were established as the land became more populated and finally became a country. By the mid-1800s practically each town had its own brewery, and many cities had more than one. These breweries served their local area, and people bought beer exclusively from them. Shipping costs made it prohibitive to transport beer from other towns, so local breweries prospered.
Changes in the nation’s transportation infrastructure made shipment of beer cheaper, enabling some local brewers to become regional brewers, selling their beers to larger areas. By 1876, the United States had 2685 breweries, an all-time high. Some of these regional breweries eventually became national breweries, selling their beer all across the country. When this occurred, however, it was at the expense of the local and regional brewers.
By 1976, the United States had only 49 breweries operating 94 plants, and these supplied the entire country. Of these, the top 4 breweries controlled 63% of the industry, and the top 8 controlled 83%. During the 1970s, however, a new movement of microbreweries and brewpubs brought a new wave of brewery start-ups. By 1993, 382 craft breweries† were in operation in the United States, in addition to the larger operations. Although the brewing industry actually grew since 1977, it was not because of the big breweries but rather the smaller breweries, which began to cater to a market of connoisseurs.
How did this process of consolidation occur? What specific reasons explain why a handful of breweries came to dominate the industry? Why did the number of breweries increase in the late 1970s and 1980s? What difficulties did these craft breweries have in opening up shop?
Part I in this series of articles examines the trend from expansion in colonial days and through the mid-1800s to the consolidation of the late 19th century through Prohibition. Part II will discuss the post-Prohibition beer industry, which sets the stage for Part III, the rebirth of craft brewing through the microbrewery and brewpub movement.
†Craft breweries describes those that sell <15,000 bbl/year. Microbreweries sell beer packaged in bottles or kegs. Brewpubs sell beer on premises, on tap, and usually also serve food.
Beer in Early American Culture
The settlers who came to America had a strong tradition of consuming beer and spirits in place of water. It must be remembered that, in the seventeenth century, beer was the universal beverage of Englishmen and those who lived on the Continent. The water was, generally speaking, not to be trusted; by tradition it was considered unwholesome — and with good reason, of course, since contamination of common water supplies was hardly surprising in an age when hygiene was not understood.
A note in one woman’s diary indicated that her husband had given her his beer in exchange for her water because she was sick: “I am sory he should sofer soe much for me he drinks water that I might drink bere”.
Many agricultural workers received a stipend of beer each day. At Harvard, the first president of the college was ousted from office because he failed to provide the students their daily ration of two pints of beer. The college had a brewhouse on campus to provide for these needs. Because brewing was so important and grain so scarce, students could pay their tuition in malted barley. Malt had such worth it was even mentioned in peoples’ wills.
Home brewing was a necessity for most early settlers. Beer was homemade for the same reasons clothes and foodstuffs were homemade: self-sufficiency. And beer was a daily staple, drunk with every meal because it was thought to be healthful. According to David Pieterssen de Vries, a visitor to the English colony at Hartford, “these English live soberly, drink only three times at a meal …”. Evidence that many settlers brewed can be found in property sales notices, which contain references to “property sales including brewhouse”. In addition, home brewing was indirectly supported because “it appears that private brewing did not come under the provisions of the excise law, as long as the beer prepared in the home was not sold”*.
Early home brewers include some from the ranks of the famous. George Washington, James Madison, and Thomas Jefferson were all home brewers. After he left office, Jefferson pursued home brewing with a vigor. Baron cites copies of letters Jefferson wrote looking for corks, bottles, and other brewing equipment.
As the Union grew, so did the number of commercial breweries. Gradually home brewers abandoned brewing in favor of purchasing beer from local breweries. Apparently home brewers switched to local beer, consciously or not, for the same reasons that home bread bakers and home clothes makers did later on: cost, quality, and convenience. As the U.S. agricultural economy grew, barley prices dropped, fueling the incentive for the creation of more breweries.
Tastes and Styles Change, Mid-1800s
Until the 1840s, the prevalent style of beer consumed in the United States was ale, in whatever its form — stout, porter, pale ale, and so forth. This preference can be attributed to two reasons: the contemporary brewing technology, and the drinking habits that the colonists inherited from the British. In 1844, however, a man named Johann Wagner changed U.S. drinking preferences when he brought bottom-fermenting lager yeast from his native Bavaria.
From the 1840s on, lager beer caught on as Americans’ beer of choice. “By the mid-’fifties [1850s] it became possible to see that lager would eventually outsell ale and porter in the United States. The figures reported for Philadelphia in 1857 were 180,000 barrels† of lager manufactured, as contrasted with 170,000 barrels of ale, stout and porter”. According ro Anderson’s From Beer to Eternity, lager has a 90% share of the U.S. beer market today. Although lager’s market share increased, many of the small brewers failed to make the change, which is one of the reasons for the demise of the smaller breweries.
Improved Transportation: Gains … and Losses
Perhaps the most important reason these local brewers went out of business was that some of the brewers in the late 1800s became shipping brewers — those who brewed and shipped beers outside of their local or regional areas. Shipping brewers were the brewers that later became Anheuser-Busch, Stroh’s, Falstaff, Miller, and others. These brewers had the funds to defeat the locals in the chase for market share.
Shipping brewers were companies that “depend[ed] on selling beer in markets reached only by long distance transportation” . Shipping brewers needed to be able to charge a premium price for their beers to cover transportation costs and were able to convince the public that their beers, because they were from so far away, were of a higher quality. The term premium beer had nothing to do with premium ingredients or processing, but rather referred only to the price.* Once the costs of shipping dropped as a result of multi-plant brewing and reduced bottling and canning costs, however, shippers were able to retain the premium price, something that the regional and local brewers had never even been able to establish.
*This mirrors current U.S. law. Home brewers and wine makers may make up to 200 gal of beer without paying excise taxes; only 100 gal is allowed if that person is not the head of household (26 USC Sec. 5674).
†A barrel is 31 gal of beer. It was the old keg size and is used as a yardstick when comparing brewery capacity and production. Since a full 31-gal keg would weigh at least 248 lb (not including the keg itself) a standard keg is now a half barrel (15.5 gal).
Most of the early breweries in the United States did not ship beer beyond a very local market, not only because of shipping costs but also because of the need to keep the beer cold and fresh. Pasteurization was not used until 1873, and beer could not be shipped great distances without the possibility that delaying consumption would cause it harm. During the late 1850s the railroads began their ascendancy, but brewers could not easily make use of their services because of the the hazards of spoilage. This problem was exacerbated by the fact that “Americans preferred a lager closer to the Pilsen than to the Munich type: i.e., a pale, light-bodied, clear and effervescent beer, relatively low in alcoholic content”. Further, low-alcohol beers are more susceptible to infection.
In addition, brewing lager beers requires that they be lagered (stored) at near-freezing temperatures. The Germans achieved the required lagering by using caves. Brewers in the United States used underground caves or dug into the earth. During the summer, these brewers would buy massive quantities of ice to help keep the temperature as low as possible.
The much-prized lager of the era could easily deteriorate if it were not handled properly, during both storage and shipment. Brewers needed on-site warehouses that could maintain low temperatures, even in the summer, and this program required massive amounts of ice. The up-and-coming breweries like Anheuser-Busch shipped their beer great distances by establishing railroad ice houses along their routes. “In 1877 he [Adolphus Busch] was the first brewer to ship his brew in refrigerated rail cars”. Busch later owned his own railroad — the Manufacturer’s Railway Company in St. Louis — to control this aspect of the shipping business. The current Anheuser-Busch Company still owns it.
In total, the new lager beers required more capital investment in refrigerated cars and warehouses and the ice to keep both of these operating. Larger and larger breweries were the only ones that could afford to pay the price. Along with these capital improvements were the employees required to use and maintain them. As refrigeration became non–ice based, mechanics were needed to maintain the refrigerators. Ale brewers, which encompassed many of the smaller breweries, did not require refrigeration for their beers, as long as they didn’t try to ship them too far.
Advent of Pasteurization
One of the most important developments in brewing technology, and in food processing technology, was the advent of pasteurization. Pasteur was involved in the brewing industry because he was trying to determine why some beers became defective and subsequently spoiled. His hypothesis was that spoilage usually occurred because of bacteria entering the beer. His solution was to “steam” the beer by immersing its vessel into a hot water bath (~150 °F) to kill any bacteria.
Pasteurization benefited lager producers for two reasons. First, they were attempting to become shipping brewers and needed to be able to consistently deliver a quality product that consumers would buy. Pasteurization enabled these brewers to reach this goal of sanitation.
Second, pasteurization was one more layer of mechanization that all brewers would have to use if they wished to remain on par with the shipping brewers. Smaller brewers were unable to do this. In addition, if the smaller brewers wanted to remain competitive, they would also have to buy bottling equipment — another expensive capital expenditure. That is why many of them, even after Prohibition, still mainly kegged their beers.
The Tax Man Cometh
Perhaps one of the most unusual, but still important, reasons why the bigger brewers were able to bolster their position in the beer marketplace had to do with the excise tax that was levied on beer. The excise tax created one direct competitive advantage for the larger brewers, and one completely unintended effect.
The Federal Excise Tax on beer was established in August, 1862, and was set at $ 1/bbl. Its purpose was to raise money for the Civil War. In addition to the excise tax, the act provided for commercial breweries’ licensing fees. In time it would have the effect of helping the shipping brewers because they had a higher profit margin on the beers they sold. The shippers made more profit per barrel because of the premium price they received and could more easily absorb the increases in the excise tax.† As time went on and the excise tax increased, this margin would become even greater for the shippers relative to local brewers.
The excise tax provided the larger breweries another advantage relative to the smaller breweries. The tax allowed for an amount of beer wastage that was exempt from the tax; the excise tax was paid up front, but the brewers received a rebate on the tax later on. A figure of 10% wastage was granted when the law took effect; however, this figure was reasonable for lager brewers, but not for the ale brewers who apparently suffered more wastage — and who therefore paid more tax than they should have been obligated to pay. Some of the wastage was due to the fact that ales were not kept cold and were more susceptible to infections.
The other effect of the excise tax was the creation of the United States Brewing Association, which was was founded in response to the adoption of the excise tax. The brewers felt that they needed to have an organization that would lobby for their interests. Baron points out that the United States Brewing Association and the temperance movement share the stage as the first lobbying organizations in the United States.
*According to Elzinga, “There is no convincing evidence that premium beer itself entails significantly higher production costs. According to Burck, Anheuser-Busch’s Busch Bavarian, a popular price brand [lower priced than premium brand], costs 1/2 cent less per bottle to produce than Budweiser, a premium brand”.
†The excise tax, which started at $ 1.00, increased gradually over time. During World War I it jumped to $ 1.50, then to $ 3.00, and then to $ 6.00. During World War II it went from $ 5.00 to $ 7.00. It remained fairly flat at $ 9.00 from 1951 to 1990, at which time it jumped from $ 9.00 to $ 18.00 per barrel; this value includes only the federal excise tax. Various states maintain their own excise taxes.
The brewing organization, however, mainly consisted of the most powerful brewers. Because the most powerful brewers were lager brewers and because many were of German ancestry, the first meetings and the newsletter were published in German.
One of the most unusual problems in the collection of the excise tax was how it was managed when it came to bottles. The government was certain to collect the excise tax because each keg leaving the brewery had to have a stamp over the bung.* If the stamp was not in evidence, the revenue agents would not let the keg leave. Once the keg was tapped the stamp would be destroyed so that it could not be used twice. This practice has carried forward to modern-day liquor and cigarette excise tax stamps.
The difficulty arose when it came to bottling — something the shipping brewers and some local brewers were involved in. To be sure that the Internal Revenue Service collected the tax, the regulations were set up in such a way as to require a brewery to have a completely separate facility for bottling. The kegs were filled with beer, the stamps attached, and then either by hoses attached to the bungs or by other means, the kegs were used to fill empty bottles with beer. For example, “The Pabst Company was filling about 75,000 barrels of beer a year [in 1890] in the racking [bottling] room simply to take them across the street to the bottling house where they were emptied”.
The law stated that the brewery could not bottle the beer in the brewery or warehouse or anywhere on the brewery or warehouse premises. This rule also prohibits washing or storing of bottles, steaming [pasteurization], and all operations connected with bottling. Bottling must be done in a building entirely distinct and separate from, and having no communication with, the brewery or warehouse. This means that the location and arrangement of the brewery or warehouse and the bottlery must be such that it is a physical impossibility to take beet from the former to the latter without carrying the beet over the surface of a street or road which is a public highway and actually and commonly used by the public as a thoroughfare.
Although the method the government insisted upon guaranteed tax collection, it was quite onerous for even large breweries, much less their smaller brethren. Many small breweries could ill afford the completely separate building for bottling or the required stock of kegs used solely for transportation to the bottling company.
Although some breweries had their own bottling houses, many simply contracted other breweries to bottle their beers. Either way it was an added expense that many breweries could not afford as competition increased. This is where the phrase “brewed and bottled” came from. It was meant to show that it was better than beer not bottled by the brewer.
To ease this burden, the head of the Pabst Brewing Company, Captain Frederick Pabst, lobbied Congress to change the law. What he proposed was to have a system of pipes going under the street from the brewhouse to the bottling house. Somewhere along this pipeline would be a gauge that would measure the flow of beer.† When the equivalent of a barrel had passed through the system, the revenue agent had to be handed a canceled tax stamp. This system could be run only when an agent was on the premises to collect the stamps.
Although this improved system eliminated the requirement that a brewery fill the kegs just to subsequently empty them, it still required that the brewery have a separate bottling house.
Many smaller breweries continued to keg their beer, not only because of the costly requirements of the excise tax, but, most important, because most of their trade came from neighborhood taverns. They had less of a need to bottle the beer.
Effects of Foreign Investors
Many of the causes of brewery consolidation cited so far in this article related to improvements in technology. One of the outside causes of U.S. brewery consolidation was the interest of British syndicates in investing in the United States.
In the late 1880s, depression hit Great Britain. Many investors turned to the United States for safer investment opportunities, in such industries as cattle ranching and brewing.* The syndicates’ monies were used to purchase and consolidate breweries. In many cases, however, such ventures were not profitable because consumption of malt beverages was down during this time period.
*A bung was a wooden cork that fit in the side of wooden and metal kegs. Most modern kegs have no bung and are filled through the tapping connections. Genesee Brewing Company (Rochester, New York), however, still uses kegs with bungs in them.
†Today, the system is much the same. For brewpubs, the gauge is put inline before the beer goes out of the taps. Now, however, payment is made directly to the federal government; revenue agents are no longer permanent fixtures at breweries.
| Consolidation of U.S. Breweries, 1876–1919 | |
| Year | Number of Breweries |
| 1876 | 2685 |
| 1880 | 2266 |
| 1890 | 1902 |
| 1895 | 1732 |
| 1900 | 1751 |
| 1910 | 1498 |
| 1919 | 1179 |
The effect of the syndicates, however, was that smaller breweries reacted by trying to consolidate themselves to survive. Baron indicated that he believed that at this time consolidation was a common practice in industry in general, and he points to mergers in “railroads, steel and the like”.
No matter how it is looked at, the figures show the trend toward consolidation (Table I). Some of the lost breweries were very certainly just plain bad businesses, but others disappeared as a result of mergers. Many businesses had put money into new plants and equipment and could not afford to repay the loans.
Tied Houses
One way breweries sold beer with assurance of no competition was to have tied houses. Tied houses (bars or restaurants) were directly owned by the brewery whose beer they sold, or they negotiated exclusive contracts with breweries to feature only their beers. This system locked out many of the smaller brewers who could not afford to put up the sums of money needed either to buy businesses or to establish contracts with the owners. According to a 1950 article in Fortune, Few will deny that the saloon deal laid the foundation for most of the great brewing fortunes in America. A brewer simply went out and captured as many corner locations as he could, then rented or deputized the premises to a saloonkeeper who sold the owner–brewer’s beer exclusively.
Prohibition
Perhaps the largest reduction in breweries in the United States came about during Prohibition. It is interesting to note that one of the pressure points that prohibition-minded groups used was the saloon, pointing to the drunkenness and crime that was associated with the 300,000 saloons in operation at that time. It is somewhat ironic that the larger breweries saw these saloons as cash cows.
In 1919, the year before the Volstead Act took effect, 1179 breweries were in operation in the United States. By 1933, when Franklin D. Roosevelt signed a bill permitting production of “3.2” beer (3.2% alcohol), only 703 breweries remained. Only the strongest breweries survived Prohibition. Many of them attempted to change their product lines. Others simply shut down because they could sell no other products.
The West End Brewing Company† in Utica, New York, for example, began selling sodas under the name Utica Club. It also sold many nonalcoholic “near beers” based on the styles that it had previously sold. Many breweries, including West End, made and sold malt extract. It was sold in grocery stores along with explicit instructions on how not to use it to make beer.
Anheuser-Busch Brewing Company of St. Louis sold quite a few products. It made malt extract, near beers, malt beverages, and yeast. Its yeast company soon became one of the largest, outpacing the then industry leader Fleischmann & Company. Most of this yeast was used by home brewers who were using malt extract to make their own beers. According to one member of the Busch family: “If you really want to know, we ended up as the biggest bootlegging supply house in the United States. Every goddamn thing you could think of. Oh, the malt syrup cookies! You could no more eat the malt syrup cookies. They were so bitter”.
Anheuser-Busch also dabbled in other areas, including truck bodies, refrigerated cabinets (for ice cream), ice cream, and real estate. The company also sold many of its then obsolete ice houses and warehouses. It used the money to invest in other real estate holdings. There is a claim in Hernon that Gussie Busch, one of the descendants of the head of the company, even sold the “golden gates” (keg taps) to Al Capone. Capone was running his own illegal breweries and needed a way to tap his kegs, and Busch provided it. At one point someone wanted to report the keg taps as stolen, and Busch said: “We knew that the underworld had taken them. And what the hell, we were selling them”.
*See also The Populist Moment, by Lawrence Goodwyn, for evidence of the reaction to this investment by the Populists, especially the Populists’ Omaha Platform.
†The West End Brewing Company changed its name in 1980 to F.X. Matt’s.
The important thing to note about Prohibition in the United States was that it had greatly reduced the number of operating breweries by the time of repeal. If breweries were unable to expand into other businesses and remain profitable, they would be unable to reestablish themselves afterwards. Many of the breweries ventured into malt extract, yeast, soft drinks, and food products, but many of the smaller breweries just died. These smaller ones lacked the money needed to branch out into other fields: they had been doing enough just to stay alive.
Part II: Brewery Consolidation in the Aftermath of Prohibition
The 703 breweries that began producing beer after Repeal faced a new set of challenges if they wanted to remain in business. Bottling, canning, advertising, new federal and state excise taxes, and government regulation (or lack of it), among other things, all put pressure on the smaller breweries and led to many closings. This article looks at each of these factors and shows how they converged to drive hundreds of small breweries out of business.
Distribution Patterns Take a Dramatic Turn
First, let’s look at the changes Prohibition brought in government regulation and beer distribution channels. As mentioned in Part I of the series, the United States had for years allowed a system of “tied houses,” whereby brewers could own their own distributors and saloons — the whole path from the brewery to the purchaser. The end of Prohibition changed all that. Breweries faced many new regulations on their businesses, including laws regulating their ownership of saloons and distribution sources. No longer would they be allowed to own bars and have them sell only their products — they would have to compete directly with other brewers to get shelf or tap space at a bar.
Birth of the three-tier system: The new rules resulted in the formation of what was called a “three-tier” system. Breweries sold to distributors, and distributors sold to bar owners, who then sold to the consumer. Breweries, distributors, and bars or saloons had to be independently owned, and regulations dictated how much the brewery could give in the way of promotional items to the distributors and bar owners.
Despite high-minded theories of distribution of power, this new competitive system actually served to reduce the number of small brewers in the United States. The small breweries that had been able to sell their beer exclusively now faced large breweries that could drop the price of their beer for a short period of time to drive out the smaller breweries. Further, it caused the field of competition to be increasingly centered on advertising, which many of the smaller breweries could ill afford.
Saloons lose appeal: One of the more significant social changes to come out of Repeal was the popular view of saloons. Whereas before Prohibition saloons had been the place of choice to consume beer, after Repeal they had negative connotations, and many felt an impetus to dissociate themselves from them. Consumers were also beginning to have refrigerators at home, a seemingly small luxury to us but one that had immense impact on the world of the 1930s. No longer would they have to drink at a bar or send someone there for beer.
A look at the statistics for the period bears out this change in preferences. In 1934, 75% of the beer sold was in kegs; in 1936, 66%; in 1938, 55%; and in 1940, 52%. “In 1950, for instance, packaged sales accounted for 85 percent of the total combined sales of A-B [Anheuser-Busch], Schlitz, Pabst, Miller, and Falstaff, whereas, for the rest of the industry this figure was only 68 percent”. By 1991, the total for draft beer was only 11%, down from the 75% of 57 years earlier.
Although some might argue that some of this packaged beer was drunk in bars — and that may certainly have been the case — the point remains that the preference for beer was changing from draft to packaged product, and it is in this area that the larger shipping brewers had a distinct advantage. These larger brewers had both the money and the foresight to invest in high-speed bottling and canning lines; the smaller ones did not.
Douglas Greer points out that television also had a large impact on this transition in preferences, especially after World War II. He states:This new and powerful advertising medium probably provoked an overall increase in outlays, as well as extensive budget reallocations away from the older media. Moreover, it is very probable that a primary cause of the decline in draught-beer sales was television’s supplantation of the neighborhood tavern as a major source of inexpensive entertainment. For this reason the strategic importance of both packaging differentiation and mass advertising, especially that on television, was greatly enhanced.
The Proof Is in the Package
Beer had been bottled for hundreds of years, and when refillable uniform bottles were designed, the bottling process was streamlined and made more efficient. Packaging beer in bottles, however, was still quite costly, because the shippers had to send the beer from its brewery to the target market and then also have the empty bottles and cases shipped back. The weight of the glass and the liquid often resulted in high transportation costs.* “Anheuser-Busch, for example, s