Unexpected consequences

The government, through taxation, licensing, restriction of pub opening hours, has done much to shape the British brewing industry. But its actions haven't always panned out as anticipated.

When travelling to London last week I was reading "Government Interference in the Brewing Industry" by John Spicer, Chris Thurman, John Walters and Simon Ward*. I've not finished it yet, but a clear point it makes is that of unexpected consequences. That the government intervenes with an aim in mind, but the result is something completely different.

It's about the 1986-89 Monopolies and Mergers Commission inquiry which led to the Beer Orders of the 1990's. The idea was to open up the brewing industry to more competition, which the tied house system was seen to be preventing. The monopolistic tied estates of the Big Six were to swept away and all brewers given equal access to retail outlets. Of course, it didn't quite work out like that. Yes, the big brewers lost their enormous tied estates, but they were merely passed on to another set of monopolists, the big pub companies.

The phenomenon of unexpected consequences was nothing new. Something similar had happened at the end of the 19th century. Something which, indirectly, had led to the formation of those huge tied estates in the first place.

"The repeal of the Malt Act in 1880 by Mr. Gladstone, and the transference of the duty from malt to the wort prior to fermentation, was a momentous epoch in British brewing. I understand this change was sought by the barley growers, who thought it would benefit agriculture, but how, I cannot say. There is no doubt, however, that the tax on barley encouraged the buying of the best quality, as tho tax was irrespective of quality, but the result of the change caused by charging duty on wort produced instead of on barley was certainly no advantage to the farmer.

The revenue obtained from this method of taxing wort instead of malt resulted in a great gain to the State, and imposed a heavier charge on both brewer and consumer. The brewer was supposed to have been compensated by the fact that his materials were no longer being limited to malt, hops and sugar; he received the benefit of what was called the "Free Mash Tun," but this was of no real benefit to many brewers, for under the new taxation a brewer was often charged upon a quantity of beer he never obtained from his materials, because he had not the technical knowledge and plant necessary to do so. Further, the smaller brewer had not the requisite scientific and technical knowledge to obtain the standard quantities of extract from his declared quantities of materials used which the Excise authorities said he ought to have obtained. Nevertheless, he was charged duty on these standard quantities, although some extra allowance was given for "waste" against the deficiencies. This payment of tax on a quantity of wort which was not obtained was responsible, in my opinion, for the rapid decrease of home-brewing and the purchase of beer from the larger brewer. The publican-brewer found he was handicapped by a method of taxation which bore more heavily upon him than upon the larger brewer, whose greater technical knowledge of brewing and modern plant placed him in a far better position to pay the new duty."
Journal of the Institute of Brewing, Volume 42, Issue 6, November-December 1936, page 481 - 482.

I'd best explain how brewers paid tax on beer they hadn't produced. The 1880 legislation assumed that brewers obtained a certain amount of wort per bushel of malt. This is the relevant clause in the Act:

"13. (1.) Every brewer shall be deemed to have brewed thirty six gallons of worts of the gravity of one thousand and fifty-seven
degrees for every two bushels of malt entered or used by him in brewing."

No matter what the actual yield, the brewer had to pay the tax for at least one standard barrel (36 gallons at a gravity of 1057º) for every two bushels used. That amounts to four standard barrels per quarter of malt. Though the act did allow for 6% wastage during the brewing process.

How easy was it to get the yield the Excise expected? I thought I'd take a look at a big, modern brewery and see how many standard barrels they got per quarter. here are the results:

Whitbread yield per quarter of malt in 1881
Beer	Style	standard barrels	qtr. Malt	standard barrels per quarter	plus 6%
KKK	Stock Ale	450.5	127	3.55	3.76
X	Mild	767.7	197	3.90	4.13
FA	Pale Ale	158.3	44	3.60	3.81
X and XL	Mild	588.8	153	3.85	4.08
X	Mild	774.1	200	3.87	4.10
KK	Stock Ale	475.0	127	3.74	3.96
X and XL	Mild	605.4	150	4.04	4.28
PA	Pale Ale	322.2	89	3.62	3.84
Source:
Whitbread brewing record held at the London Metropolitan Archives, document number LMA/4453/D/01/047

Even allowing for the six per cent wastage, Whitbread only managed to hit the target on four out of eight brews. The yield in a small pub brewery must have been much worse. It increased the advantage large brewers had over their smaller rivals. Because of their greater efficiency, the big boys in London had already been able to brew stronger beer than the smaller ones and sell it at the same price. Now small brewers were paying tax on beer that didn't exist. It must have been tough.

I've figures of the numbers of breweries off various sizes for the right period:

UK Breweries by size 1870 - 1914
	<1,000	publican brewers	1,000 - 10,000	10,000 - 20,000	20,000 - 100,000	100,000 - 500,000
1870	26,506	-	1,809	210	128	23
1875	22,138	-	1,864	260	194	25
1879	17,542	-	1,863	301	217	27
1880	16,770	-	1,768	272	203	23
1881	14,948	14,479	1,677	275	183	24
1885	12,608	-	1,537	270	187	27
1890	9,986	-	1,447	274	255	34
1895	7,213	-	1,162	267	256	34
1900	4,759	-	910	262	308	42
1905	3,787	-	832	232	280	40
1912	2,868	2,663	673	205	266	43
1913	2,700	2,502	615	210	271	42
1914	2,536	2,357	580	197	280	46
Source:
1928 Brewers' Almanack, page 118.

You can see that the number of brewers in the smallest category, mostly pub breweries, fell dramatically between 1870 and 1900, falling from over 26,000 to under 5,000. It's easier to see the trends by looking at the percentage decrease by decade:

Change in number of breweries by size 1870 - 1900
decade	<1,000	1,000 - 10,000	10,000 - 20,000	20,000 - 100,000	100,000 - 500,000
1870-1880	36.73%	2.27%	-29.52%	-58.59%	0.00%
1880-1890	40.45%	18.16%	-0.74%	-25.62%	-47.83%
1890-1900	52.34%	37.11%	4.38%	-20.78%	-23.53%
Source:
Derived from figures in 1928 Brewers' Almanack, page 118.

The rate of closure of small breweries did indeed accelerate after 1880. While the number of breweries in the two largest categories increased. There was a clear swing to a smaller number of larger breweries.

What happened to the pubs whose breweries closed? They bought in beer from larger breweries:

"When the small brewer ceased to brew and purchased his beers instead, there arose keen competition among the bigger brewers to secure permanent outlets for their beer and in consequence excessive prices were paid for "free" houses. When these were made "tied" houses and became so numerous, competition increased to such a degree that the tenants found it hard to get a living, and tho owners had great difficulty in obtaimng remunerative rents. Further, now regulations reducing the hours of trading, with additional limitations on Sundays, and the activities of opponents of licensed houses, together with stricter magisterial administration of the licensing laws, brought about a dearth of persons of sufficient capital who desired to become tenants of properties in which the owners had invested large sums of money. As a consequence, what is known as the "managerial system" of conducting the retail trade was evolved, under which the licensed trader receives a wage and carries on the business on behalf of the owner, whereas under the "tenancy system" the licensee pays a rent, agreeing to obtain his supplies from the brewer-owner of the house and, of course, retains the profits of his trading."
Journal of the Institute of Brewing, Volume 42, Issue 6, November-December 1936, page 485.

Ultimately, those pub breweries were sucked into the tied estates of larger breweries.

So changing the taxation from malt to wort caused the closure of thousands of small breweries and helped build the tied estates of larger breweries. Not at all what the change in law had intended.



* Disclosure time: I was sent a free copy of this book.