Professor Richard A. McGowan provides the following brief history of gambling in America. McGowan describes the nation's five different "waves" of legalized gambling, from colonial days to the end of the twentieth century. Casino gambling remains the newest and dominant wave, he maintains, but state lotteries and pari-mutuel racetrack betting are still strong moneymakers. In addition, McGowan notes, the popularity of casino gaming and other legal forms of wagering reveals a national tolerance for gambling that will likely keep the industry alive and thriving in the twenty-first century. McGowan is an associate professor of the Carroll School of Management at Boston College and a research associate at Harvard Medical School's Division on Addictions. He researches business and public policy, especially as they relate to the gambling, tobacco, and alcohol industries. He is also the author of State Lotteries and Legalized Gambling: Painless Revenue or Painful Mirage and Government and the Transformation of the Gaming Industry, from which this selection is taken.
In 1984, all forms of gambling (casinos, lotteries, pari-mutuel betting: the three segments of the gambling industry) accounted for less than $15 billion in revenues. In 1995, these gambling activities generated $55.3 billion in revenues, nearly a 400 per cent increase in 11 years. Gambling had become the largest component of the American entertainment industry. It had also become a means of salvation in terms of economic development for troubled urban areas ranging from Chicago to New Bedford, Massachusetts. But the multiple roles that gambling presently fulfils, namely a form of entertainment, a method of raising revenue for states and a measure that would provide economic relief for depressed areas, are hardly unique in American history.
There have been five waves of gambling activity that have occurred in US history....
The first wave of gaming activity (1607-1840s) that occurred in the US began with the landing of the first settlers, but became much more widespread with the outbreak of the Revolutionary War. During this time, lotteries were the approved form of gambling. A few of these lotteries were sponsored by states to help finance their armies, but most lotteries were operated by non-profit making institutions such as colleges, local school systems and hospitals in order to finance building projects or needed capital improvements. For example, both Yale and Harvard ... used lotteries to build their dormitories. In 1747, the Connecticut legislature gave Yale a license to raise £7,500 while Harvard waited until 1765 to win approval from the Massachusetts' legislature to conduct a lottery worth £3,200. It is interesting to note that Harvard's fund-raising lottery was much less successful than Yale's lottery. The primary reason for the failure of Harvard's lottery was that it had to compete with lotteries that were being operated to support troops which were fighting the French and Indian War. However, it certainly appears that Harvard has learned from its past mistakes, as the timing of its fund-raising activities has greatly improved! It should also be noted that during this wave of lottery activity, no state ever operated its own lottery. Private operators conducted lotteries. An organization or a worthy project such as the Erie Canal received permission from state legislatures to operate a lottery. The funds from the lottery were used to support the 'worthy' cause.
But these private operators of lotteries often proved to be less than honest in conducting these lotteries. One of the more famous lottery scandals occurred in Washington, DC. In 1823, Congress authorized a Grand National lottery in order to pay for improvements to the city. Tickets were sold and the drawing took place, but before anyone could collect their winnings, the private agent who organized the lottery for DC fled town. While the majority of winners accepted their fate with resignation, the winner of the $100,000 grand prize sued the government of District of Columbia and the Supreme Court ruled that DC had to pay the winner. It was a sober reminder to local officials that authorizing lotteries could be potentially dangerous, and the movement to ban lotteries had begun. From 1840 to 1860, all but two states prohibited lottery activity due to various scandals that occurred in the 1820s and 1830s. However, it would take less than 40 years for lotteries to once again explode on the national scene.
With the conclusion of the Civil War, the South had to find some method to finance the construction of roads, bridges, school buildings and various other social capital projects due to the damage incurred during the Civil War. The victorious North was in no mood to provide for its defeated cousins, hence southern legislatures were desperate to raise revenues. One way to raise these sorely needed funds was to permit private operators to conduct lotteries in order to raise the revenue needed for reconstruction. The primary difference between this period of lottery activity and the previous period of lotteries is the scale of ticket sales. Whereas in the previous lottery boom sales of tickets were confined to local regions, these southern lotteries took on a national scope and ironically were particularly popular in the North. The most famous of these southern lotteries was the one conducted in Louisiana known as the Serpent. At the height of this lottery in the late 1880s, almost 50 per cent of all mail coming into New Orleans was connected with this lottery.
As was the case with the first wave of lottery activity, controversy surrounded this national lottery activity that eventually led to its banning by the Federal government. In 1890, the charter that authorized the running of the lottery in Louisiana was about to expire. The operators of the lottery bribed various state officials with offers of up to $100,000 to renew the Serpent's charter. The rather flagrant method that officials of the lottery employed to ensure that the Serpent's charter would be renewed was reported throughout the country. Various state legislatures passed resolutions calling on Congress and President [William Henry] Harrison to stop this lottery. There can be little doubt that what upset these legislatures most was the fact that out-of-states sales of Louisiana lottery tickets amounted to over $5 million per year. President Harrison urged Congress to pass legislation to curb all lottery activity. The primary piece of legislation that would cripple the Louisiana lottery was to deny the operators of the lottery the use of the federal mail. If customers could no longer mail in their requests for tickets, then the lottery's life would be short-lived. In late 1890, Congress banned the use of federal mails for lottery sales. By 1895, the Louisiana lottery had vanished and as the new century dawned, gaming activity in the US had ceased to exist. But, like a phoenix, lotteries as well as other forms of gaming would again be resurrected as governments searched for additional sources of revenue in the late twentieth century.
The Golden Age of Pari-Mutuel Betting
In the midst of the Prohibition era, a quiet revolution involving another 'sin' industry, gambling, was taking place. The two states, Kentucky and Maryland, which had the longest tradition of horse racing, decided to legalize wagering on horse races taking place in racetracks that had long and noble histories. Kentucky and Maryland sanctioned pari-mutuel betting for two reasons. First, these states were searching for a means to replace the excise tax revenues that were lost due to the imposition of Prohibition by the Federal government. Second, technology had been developed that permitted the advent of the pari-mutuel betting system, where the winners divide the total amount bet, after deducting management's expenses and state's taxes, in proportion to the sums that have been wagered individually. With the start of the Great Depression in 1929, numerous other states were also seeking any source of additional revenue. They were quick to follow the lead of Kentucky and Maryland in enacting legalized pari-mutuel betting. Since the 1920s, 45 states have legalized pari-mutuel betting with Alabama, Mississippi, Missouri, North Carolina and South Carolina being the last 'holdouts'. However ..., both Mississippi and Missouri have jumped on the gambling bandwagon in other ways.
What enabled these states to 'legitimize' pari-mutuel betting so easily and rapidly, especially during a time when another 'sin', alcohol, had been totally banned? Traditionally, racing—particularly horse racing—has sold itself as a sport, softening potential image problems caused by its association with gambling. Horse racing and other forms of racing, such as dog racing, are covered in the sports pages of most major newspapers and the 'superstars' of horse racing have appeared on the front cover of Time and Sports Illustrated. Racetracks such as Churchill Downs in Kentucky and Saratoga in upstate New York also emphasize the traditional pageantry associated with racing, such as parading the horses in the paddock, trumpeting the call to post and so on. Another factor that contributed to the 'legitimacy' of racing was that 'honesty' was assured, since some of America's wealthiest families such as the Vanderbilts, the Whitneys, and the Rockefellers controlled the racing industry. All of these factors not only contributed to the legitimacy of racing, but have also made horse racing one of the biggest sports throughout the period from 1920 to 1960.
It also gave pari-mutuel betting a virtual monopoly on gambling activity in the US throughout the middle period of the twentieth century. The racing industry's only competition was in Nevada, that had legalized casino gambling in 1930.
In 1964, New Hampshire voters approved the lottery, a form of gambling that had been utilized earlier in US history. The rationale used by proponents of the lottery to justify its legalization was strictly economic. Proceeds from the lottery were to fund education, thereby averting the enactment of either a sales or income tax for New Hampshire. The lottery was an instant success with 90 per cent of the lottery tickets being bought by out of state residents.
But this lesson was not lost on neighbouring north-eastern states. In the next ten years, every north-eastern state approved a lottery. Two rationales were used to justify the lottery activity in all these states:
- People are going to gamble, so why shouldn't the state profit from this activity;
- Neighbouring states were reaping benefits from constituents buying lottery tickets in those states, therefore the state needed to institute a lottery in order to keep the money 'home'.
One of the more interesting aspects of this surge of lottery activity is that these lotteries were operated by state agencies. They were not only state-sanctioned, but also operated by state governments.
However, the greatest growth of state lotteries occurred in the period between 1980 and 1990. During this time, 25 states not only approved lotteries but other additional forms of gambling such as off-track betting (OTB), keno (a type of high stakes bingo that is played every five minutes) and video poker machines (usually found in bars and restaurants). All of these new forms were meant to supplement the revenue capabilities of lotteries. By 1993, only two states (Utah and Hawaii) did not have some form of legalized gaming. Lotteries and associated forms of gaming had gained a social acceptance that had not occurred in previous waves of lottery activity....
The Triumph of Casino Gaming
In 1993, for the first time in US gaming history, revenues for casino gaming were greater than those generated by lotteries. This occurrence heralded a remarkable turning point for the gambling industry. Casino gambling was now the preferred form of gaming in the US. It also marks a turning point on American acceptance of gambling as a legal source of entertainment. Finally, this development returns the control of gambling operations to private concerns, since the casino gaming operations are owned and operated by private corporations although they are certainly heavily regulated by the states....
How did this expansion of casino gaming take place? There is a three-part explanation for this rise in casino gaming. First, during the late 1980s, the two 'traditional' markets for casino gambling, Las Vegas and Atlantic City, transformed themselves from strictly casino operations to 'family' oriented vacation centers. For example, in trying to renew its Las Vegas operations, MGM not only renovated its casino operation but also built a theme park. In Atlantic City, casino operators were able to add hotel rooms as well as receiving relief from various regulations concerning their operations. The threat that Native American Gambling ... posed persuaded New Jersey legislators to protect its casino industry. Overall, these two locations experienced a 22 per cent increase in gaming revenues and a 24 per cent increase in visitors during the early 1990s.
The other form of casino gambling that became popular in the 1990s was riverboat gambling. In 1989, Iowa was the first state to permit it, soon to be followed by Louisiana, Illinois, Indiana, Mississippi and Missouri. It is interesting to note that all of these states had lotteries except for Mississippi. Why this turn to riverboat gambling? Riverboat gambling was portrayed as a limited form of casino gambling. Players could only play for two hours at a time and for only a set amount of money. For example, in 1990, when Iowa established its riverboat gambling, the boats had to sail for two hours and patrons were only permitted to bring $500. After the boat docked, all the patrons had to leave the boat and new patrons were permitted to board for another cruise. Yet, as other states entered the riverboat gambling industry, these restrictions were gradually lifted so that virtually no restrictions remain.
The final source of casino revenues is the Indian casino gaming operations. In 1988, Congress passed the Indian Gaming Regulatory Act (IGRA) that permitted Indian tribes to develop casino and bingo parlors into major economic centers. By far the most successful of these Indian casinos has been Foxwoods in Connecticut, which is the world's largest casino generating nearly $800 million in 1995. Revenues from Indian casino operations exceeded lottery revenues in 1995....
Casino gambling has clearly become the dominant force behind a virtual explosion of gambling activity in the US. Clearly gambling, and in particular casino gambling, has become socially acceptable.... Throughout the 1990s between 85 per cent to 90 per cent of the US adult population believed that gambling was an acceptable form of entertainment, while between 10 per cent to 15 per cent of the US adult population thought that it was an activity that government ought to outlaw or prohibit. Gambling had achieved 'legitimacy' as an activity and was now 'tolerated' by government because it was seen as a source of revenue and an engine of economic renewal for depressed areas.