Distillers and Chemists: Strategic Capture of the Bottled-in-Bond Act of 1897

Capture without foreclosure: how a consumer-protection law manufactured a premium segment and handed the rents to incumbents

Regulation
Public Choice
Economic History
Working Paper
A public-choice reinterpretation of America’s first quality-certification law. Using a newly digitized state-by-fiscal-year panel (FY1877–1920) built from the Commissioner of Internal Revenue’s annual reports, the paper shows the Act did not foreclose the rival rectifier trade — instead it manufactured a certified premium segment that grew ~24% per year, with 92% of the rents flowing to incumbent Kentucky and Pennsylvania distillers.
Modified

July 2, 2026

Job market paper · sole-authored

Overview

The Bottled-in-Bond Act of 1897 is usually remembered as one of America’s first consumer-protection laws — a federal guarantee, in an age of rampant adulteration, that what the label promised was what the bottle held. This paper reads the Act through public choice instead: as a government-administered solution to a credence-goods problem the straight distillers of Kentucky and Pennsylvania could not solve privately. Their brands and marks were freely counterfeited down a distribution chain they could not police; a Treasury strip stamp, backed by federal criminal law, made their quality signal excludable in a way no private mark ever had.

The reframing yields a sharp, testable distinction. If the Act worked by raising rivals’ costs, certified output should have grown at the expense of the rectifiers (blenders of cheaper neutral spirit) and a scarcity rent should have opened in relative prices. If it worked by certifying quality, a new premium tier should have grown from a near-zero base without the rectifying trade falling. The two mechanisms make opposite predictions — and the data can tell them apart.

The evidence comes from a newly digitized state-by-fiscal-year panel built from the Annual Reports of the Commissioner of Internal Revenue, FY1877–1920 — whiskey deposited into bond, tax-paid withdrawals, spirits rectified, distilleries operated, grain consumed, and (after 1897) withdrawals under the bottled-in-bond stamp — validated against the printed totals through 458 cross-year chain assertions.

Abstract

“The Bottled-in-Bond Act of 1897 allowed whiskey to be sold under a federal strip stamp certifying it as the unblended product of a single distillery and season, aged four years in a government-supervised bonded warehouse. Conventionally read as consumer protection, the Act is reinterpreted here, through public choice, as a government-administered credence-goods certification. Using a newly digitized state-by-fiscal-year panel built from the reports of the Commissioner of Internal Revenue, we estimate a common-treatment-date event study and difference-in-differences and find that the Act did not foreclose the rectifier trade: rectified output grew at least as fast as straight whiskey after 1897. Instead it created a distinct certified premium segment that expanded roughly twenty-four percent per year from a near-zero base, with its rents concentrated overwhelmingly among incumbent Kentucky and Pennsylvania producers. Capture operated not by raising rivals’ costs but through the geographic distribution of a manufactured premium segment.”

A preview of the findings

1. No foreclosure. Indexed to 1896, rectified output reaches 186.1 by 1905 against straight whiskey’s 170.6 — the trade the bill’s proponents complained of grew faster, not slower, after the Act. The within-state difference-in-differences on the straight–rectified gap is near zero, and the rectified series rises rather than falls.

2. A manufactured premium segment. The genuine expansion is the certified sub-segment itself: bottled-in-bond withdrawals grew from 0.54 million gallons in FY1898 to 16.51 million in FY1917 — a thirty-one-fold increase — at roughly 24% per year relative to rectified output. And it is net-new volume, not relabeling: within adopting states, bonded gallons did not displace non-bonded straight output (elasticity ≈ −0.10, far from the −1 that one-for-one relabeling implies). A hedonic model of hand-collected price quotes attaches a ~9.6% premium to the bonded label, conditional on age and channel, while the certifiable–rectified price gap does not widen — the price pattern a quality-signaling mechanism predicts and a scarcity-rent mechanism does not.

3. Geographically captured rents. Kentucky and Pennsylvania together supplied 92.2% of all bonded withdrawals over 1898–1904, with the Louisville collection district — home market of the Act’s chief proponent, E. H. Taylor Jr. — alone taking nearly a third of the national total. The demand for certified whiskey was actively cultivated by Harvey Wiley’s federal purity chemists, whose authority the distillers enrolled to teach buyers to distrust uncertified spirit. The mechanism is credence-segment creation; the distribution is geographic rent capture.

The upshot: capture need not look like foreclosure. A regulation can expand a market, resolve a real information asymmetry, and still function as capture through who collects the rents it manufactures.

Bonded whiskey withdrawals by state, 1898–1920

Hover any line to read the exact figure — the certification was overwhelmingly a Kentucky (and Pennsylvania) phenomenon.

Selected figures

Line chart of national bottled-in-bond withdrawals rising from 0.54 to 16.51 million gallons, 1898–1917, with Kentucky and Pennsylvania supplying most of the volume

Bottled-in-bond withdrawals and their geographic concentration, FY1898–1920. National bonded withdrawals rise from 0.54 million gallons in FY1898 to 16.51 million in FY1917; Kentucky and Pennsylvania account for the bulk of the volume throughout.

Chart comparing the small but fast-growing bonded sub-segment with the much larger straight and rectified output series

The certified sub-segment against straight and rectified output: a small tier expanding on top of an existing trade, not a redistribution of it.

Indexed output series showing rectified spirits growing at least as fast as straight whiskey after 1897

The quantity horse-race: rectified output grew at least as fast as straight whiskey after 1897 — the pattern that rejects the foreclosure reading.

Key estimate

Hedonic price model (log price per proof gallon; rectified spirits the omitted category; channel, state, and year fixed effects):

Variable Coefficient Std. error
Bottled-in-bond +0.096* 0.058
Age (per year) +0.074*** 0.009

N = 187; R² = 0.66. *p < 0.10, ***p < 0.01. Stable across real-price and high-confidence-quote specifications.

JEL codes: N41 · L51 · D72 · K23

Keywords: bottled-in-bond, regulatory capture, credence goods, certification, whiskey

Suggested citation: Smith, Jacob R. (2026). “Distillers and Chemists: Strategic Capture of the Bottled-in-Bond Act of 1897.” Working paper, Middle Tennessee State University.

Note

This page is a preview. The full draft — including the common-treatment-date event study, the relabeling test, the legislative and archival record on intent (the committee report, the Aldrich “or owner” amendment, the organized rectifier remonstrances), and the complete robustness battery — is available on request at jrs2ge@mtmail.mtsu.edu.