II. History of Gambling in the United States
Examining the history of gambling in North America suggests important conclusions that are useful today in considering policies related to gambling.
Societal standards and laws related to gambling have tended to change back and forth from prohibition to regulation. These changes in law have led one noted observer, Professor I. Nelson Rose, to describe three waves of gambling regulation during the history of the colonies and the United States.1 The first wave began during the colonial period and lasted until the mid-1800s. The second wave commenced at the close of the Civil War and lasted until the early 20th century. The last wave started during the Great Depression and is still going strong. Because of the length and size of this last wave, another observer has characterized it as an explosion, not a wave.2
The First Wave: 1600's to mid 1800's
The early colonies had very different attitudes towards gambling. Historians have classified the early settlers into two groups, the English who brought along the English traditions and beliefs, and the Puritans. Although the Puritans came from England, they came to the new world to create a better society and discard the values of their mother country. To them, the new world represented an opportunity for establishing a society grounded on Puritan values and beliefs.
Entire colonies were established along the guidelines and beliefs of one group or another. In particular, different attitudes towards gambling were enforced. In New England and Pennsylvania, Puritan attitudes toward gaming and play were adopted. The Puritan-led Massachusetts Bay Colony outlawed not only the possession of cards, dice, and gaming tables (even in private homes), but also dancing and singing. This stance was relaxed slightly the following year so as to allow gaming as long as it was for innocent and moderate recreation and not as a trade or calling. This hostility towards the professional gambler is a common theme that will be seen again as we look at the history of U.S. gambling.
In other colonies, English attitudes towards gambling and recreation prevailed. These settlers brought with them the view that gambling was a harmless diversion. In these colonies, gambling was a popular and accepted activity. Legal gambling tended to be those types that were considered proper gentlemen's diversions. For example, it took a long time for cock-fighting to become legal because it was not considered a suitable game for gentlemen.
One prominent researcher speculates that the appeal of gambling was probably heightened by the frontier spirit. The desire to explore new worlds is similar to gambling. Both rely heavily on high expectations, risk taking, opportunism, and movement.3
Despite the acceptance, gambling began to be blamed for the problems of the colonies. To investors and others in England, the prevalence of gambling suggested an atmosphere of idleness and vice. Financiers began to suspect that it was the root cause of the inability of the colonies to sustain themselves.4 The colonies had been relying on England to supply provisions and to replace dying settlers.
Lotteries Used to Bail Out the Early Colonies. Although the financial backers of the colonies viewed gambling as a source of the colonies' problems, they began to see it as the solution as well. The Virginia Company of London, the financier of Jamestown in Virginia, was permitted by the Crown to hold lotteries to raise money for the company's colonial venture. The lotteries were relatively sophisticated and included instant winners. Eventually, the crown banned the lotteries because of complaints that they were robbing England of money.5 The company dissolved shortly thereafter.
This episode was not the last use of lotteries to benefit the colonies. All 13 original colonies established lotteries, usually more than one, to raise revenue. Playing the lottery became a civic responsibility.6 Proceeds helped establish some of the nation's earliest and most prestigious universities -- Harvard, Yale, Columbia, Dartmouth, Princeton, and William and Mary. Lottery funds were also used to build churches and libraries. Ben Franklin, John Hancock, and George Washington were all prominent sponsors of specific lotteries for public works projects.
Lotteries became an issue in the drive for independence of the colonies. The colonies protested the crown's rules for holding lotteries. In 1769, the crown tried to prevent lotteries from occurring without its permission. Once the war of independence started, the Continental Congress voted a $10 million lottery to finance the war. The lottery had to be abandoned, however, because it was too large and the tickets could not be sold.
The Popularity of Lotteries Continued in the Early 19th Century. Notable among the later lotteries was a private lottery passed by Congress in 1823 for the beautification of Washington D.C. Unfortunately, the organizers absconded with the proceeds and the winner was never paid.
Lotteries were not the only form of gambling during this era. Wagering on horse racing was a popular form of gambling. Not surprisingly, it was not quite as organized nor as elaborate as modern horse racing. Rather, the gambling was limited to a few friendly bets between owners of horses and their partisans. The first racetrack in North America was built on Long Island in 1665.
Casino gaming started slowly. Taverns and roadhouses would allow dice and card games. The relatively sparse population was a barrier to establishing gaming houses. But as the population increased, by the early 1800s lavish casinos were established in the young republic.
The United States and Gambling Move West. As previously mentioned, gambling and the frontier lifestyle shared similar foundations -- a spirit of adventure, opportunity, and risk taking. During the early 1800s gambling in the lower Mississippi Valley became a legitimate and organized enterprise. The Mississippi River and connected waterways were major avenues of trade for farmers and merchants and the river boats carried passengers who had lots of cash. The south tended to have a more open attitude towards gaming, reflecting the Spanish, French, and early Virginian traditions.7 New Orleans became the capital for gambling.
Gambling establishments were started in the river towns and were popular haunts for both travelers and professional gamblers. These gamblers preyed upon these cash-laden travelers who were, "Seduced by the bright prospects of their business deals as well as by the transience of the river frontier..."8 These professional gamblers, also known as sharps or sharpers, generally were dishonest and often turned to confidence games and cheating to make money.
During the 1830's, the actions of the professional gamblers came under growing scrutiny and southern settlers turned against the professional gambler. The professional gamblers were blamed for limiting economic growth, interfering with business, endangering the streets, committing numerous crimes, and debasing the morality of the society. Vigilantism was one method by which the anti-professional gambler sentiment manifested itself. Groups of citizens organized to push the gamblers out of the South.
In 1835, a vigilante group lynched five cardsharps in Mississippi. Professional gamblers moved from the town into the riverboats. Lynching proved to be a successful policy option for reducing the presence of professional gamblers. In contrast to the river boat casinos of today, the old-time river boats were not floating casinos. Gambling occurred informally among the passengers. The period between 1840 and 1860 represented the glory days of the flashy riverboat gambler. The professional gamblers also moved to California, a history we cover in the next section.
The First Wave of Legal Gambling Draws to an End. During the early 1800's, gambling came under increasing attack. There was always a group opposing gambling on moral grounds. This opposition was largely based on religious beliefs.9 The flames of opposition were fanned, however, by the prevalence of scandals and the belief that the poor were being targeted, especially by lotteries. This opposition drew strength from the larger climate of social reform. Issues such as temperance, women's rights, educational reform, prison reform, and abolition of slavery were on the minds of many. Although there was strong sentiment to avoid interference with market forces, there was a countervailing view that people should behave in a virtuous way and that meant no gambling.10
The attack against gambling was focused particularly on lotteries because it represented a form of wagering that was offensive to both the moral sensibilities of reformers, and the Jacksonian resentment toward privilege.11 The exclusive charters granted to lottery operations were examples of this form of privilege. Ironically, President Jackson was an inveterate gambler12 and had such a history of problems that he must be viewed as a likely addictive or compulsive gambler. His gambling was well-known but tended to be seen as the behavior of a gentleman, hence he was reserved the disapprobation held for commercial gamblers.
Lottery Scandals Led to Gambling Prohibition. As noted earlier, lottery for the beautification of the nation's capital ended in scandal with the operators absconding with the proceeds. This incident illustrated the problems with the lotteries of that time as many were crooked. Increasing evidence of fraud and dishonesty in the operations of lotteries added to the opposition.13 An additional argument was that they corrupted the free press and made them captive to their huge demand for advertising.14
The antilottery forces fought against lotteries and prevailed. In 1833 Pennsylvania, New York, and Massachusetts put an end to state authorized lotteries. By 1840, most states had banned lotteries. By 1860, only Delaware, Missouri, and Kentucky still allowed state-authorized lotteries. Nevertheless, the tickets of these few states were shipped around the country by mail or smugglers. The prohibition also led to the creation of illegal lotteries.
The demise of the riverboat gambler had more to do with circumstance than direct action by the people. Emergence of railroads and the outbreak of the Civil War were the precipitating factors. Travel by steamboats declined as railroads started to supplant steamboats as the favored method of transportation. Trains were more reliable and were faster than the riverboats. The Civil War interrupted virtually all river travel and abruptly diminished gambling in that area.
The end of the first wave did not result in an end to all legal gambling. The prohibition was selective in terms of type of gambling and location. The frontier areas, California included, saw a great deal of gambling after the end of the first wave. Because of the wholesale fraud, lotteries were targeted for prohibition, but gambling in posh clubs were still legal in New York. Horse racing survived the end of the first wave relatively unscathed. As such it is more difficult to draw a clear distinction between the end of the first wave and the beginning of the second. As we shall see later, the demarcation between second and third waves are much clearer.
It was also during this time that the Grimaldis sold a concession for gaming in an attempt to keep their principality, Monaco, from going bankrupt. Monte Carlo was opened in 1858 by gambling operators who had been forced to leave Hamburg, Germany after popular opinion turned against gambling. The public disfavor in Germany occurred because of the charge that legalized gaming was turning the city into a nest of paupers.
Second Wave: Mid-1800's to Early 1900's
The expansion of the western frontier spurred the second wave. As the country moved westward, the frontier spirit continued to spread. Mining booms increased the rush to the Far West. Miners lured by the promises of easy and abundant riches, personified the frontier spirit better than the explorers before them. Mining was a gamble, and risk-taking was valued for it represented an opportunity for great wealth. These were restless and ambitious people who had high expectations.15 Probably nowhere was this more apparent than in California.
Gold Rush Set Off a Gambling Boom in California. The gold rush brought a huge increase in the amount and types of gambling to California. San Francisco replaced New Orleans as the center for gambling in the United States. The market for gambling space was so strong that a mere canvas tent, 15 by 25 feet, cost $40,000 annually, payable in advance with gold dust.
The apex of California gambling was from 1849 to 1855. Gambling became widespread throughout the state whether it was in Mexican towns like Monterey, mountain towns like Mariposa, or growing cities such as Sacramento. During this period, gambling tended to be integrated. Patrons included women, blacks, and Chinese. By 1850, both the state and cities were licensing gambling establishments to raise money.
As settlers spread beyond California, so did gambling. In general, gambling and the west were intimately linked. Gambling was especially widespread in the mining camps that multiplied as the miners spread across the west searching for new strikes.
Public Opinion Quickly Turns Against Gambling. Laws against gamblers and gambling began to be enacted in California. As with the rest of the United States, the desire for respectability and a recognition of the social ills tied to gaming led to limits on gambling. The Legislature made most types of gambling illegal. However, the Legislature's initial aim was more to target the professional gambler than gaming in general. Gamblers were affiliated with municipal corruption and were blamed for the depression that was occurring at the time.16 Lynching of professional gamblers occurred in San Francisco in 1856, in part a result of the fight for political control of the city. The gamblers were strong backers of one political faction.
Initially, the state laws were weak and had little real effect on gambling. The statutes outlawed specific games, making the laws difficult to enforce as new and unnamed variants were used and only light penalties were provided. However, the laws were gradually strengthened. In 1860, all banking games were banned. (Banking games are those where the player bets against the house.) Initially, the laws tended to focus on those who ran the games, not the players. In 1885, this was changed so that it was illegal to play. Finally in 1891, the statutes made the penalty for playing equal to the penalty for running the game.
The Prohibition Did Not Eliminate Gambling But Drove it Underground. Even in California, where most gambling was illegal, the first slot machine was invented and premiered in San Francisco in 1895.17 It was not specifically outlawed until 1911.
Nevada bounced between legalizing and banning gaming. Gambling was legal in Nevada between 1869 and 1910. As a result, gaming activity moved from California to places such as Virginia City, Nevada. Although legally protected, during this time gambling never reached the size in Nevada that it did in San Francisco.
Another effect of the antigambling laws was to stratify gaming activity more. One result was the prevalence of Chinese gaming houses that catered only to Chinese. There were also large Chinese-run lotteries that appealed to non-Chinese. Enforcement of the gaming laws became a method of discrimination. During times of strong anti-Chinese sentiment the gaming laws were enforced more vigorously against Chinese establishments.18 One operator in San Francisco who alleged discrimination took a case to the U.S. Supreme Court, but lost because he could not show that people who were not Chinese violated the law, but were not prosecuted.
Los Angeles also had gaming activity, but it was overshadowed by San Francisco. Like the city itself, gaming in Los Angeles had more of a Hispanic flavor and occurred on a smaller scale. The city eventually banned gambling which led to a number of illegal clubs and the spread to permissive suburbs.
Lotteries Began a Comeback. Following a long national tradition, the South turned to lotteries to generate revenue to rebuild the war-ravaged region. The Louisiana lottery was the most notable because of its unseemly end. In 1868, the Louisiana Lottery Company was authorized and granted a 25-year charter. A carpetbagger criminal syndicate from New York bribed the Legislature into passing the lottery law and establishing the syndicate as the sole lottery provider.19 The Louisiana Lottery was an interstate venture with over 90% of the company's revenue coming from outside Louisiana. This lottery was a prolific money maker. Attempts to repeal the 25-year charter were defeated with assistance of bribes to legislators.
Scandals and antigaming sentiment led to additional state and federal legislation against lotteries. In particular, religious leaders led the move against them.20 By 1878, Louisiana was the last of the legal lotteries in the country. The Louisiana Lottery survived until Congress enacted a prohibition against moving lottery tickets across state lines by any method. This act led to the abolition of the Louisiana Lottery in 1895. When the lottery was disbanded, it was discovered that promoters had made huge sums of ill-gotten gains. The Legislature was riven with accusations of bribery. By the end of the century, thirty-five states, including California, had in their constitutions prohibitions against lotteries and no state permitted the operation of lotteries.
Lotteries Were Not the Only Source of Gambling Scandal. Horse racing was plagued by fraud. The odds and payouts were often faked. The parties taking the bets, known as the bookmakers, often owned horses and were able to influence the race. "Ringers," horses that were fraudulent substitutes and were either much quicker or slower than the expected entry, were often raced.
The second wave of legal gambling, was relatively short-lived. Scandals and the rise of Victorian morality led to the end of legal gambling. By 1910, virtually all forms of gambling were prohibited in the U.S. The only legal betting that occurred was in three states which allowed horse racing, but even that number shrank in the ensuing years.21 The feelings against gambling ran so strong that Arizona and New Mexico were forced to outlaw casinos to gain statehood.22 However, the prohibition did not stop gambling. There were many types of illegal gambling houses. Some operated openly for many years. They, of course, had to pay protection money to the law enforcement authorities.
Third Wave (Early 1930's to Present)
The great depression led to a much greater legalization of gambling. The antigambling mood changed as tremendous financial distress gripped the country, especially after the stock market crash of 1929. Legalized gambling was looked upon as a way to stimulate the economy. Massachusetts decriminalized bingo in 1931 in an attempt to help churches and charitable organizations raise money. Bingo was legal in 11 states by the 1950s, usually only for charity purposes.
Horse racing and parimutuel wagering began to make a comeback. In 1933, Michigan, New Hampshire, Ohio, and California legalized parimutuel betting. The California Legislature adopted a statute in 1933 referred to as the Horse Racing Act. The statutes took effect upon adoption by the voters of an amendment to the Constitution in June of 1933. During the 1930's, 21 states brought back racetracks. New laws and automated systems made horse racing much more honest than during the 1800s.
Coincident with resurgence of legal gambling was a crackdown on illegal gambling, in part because illegal gambling had become so prevalent. A backlash developed and reform candidates were swept into office in New York where Fiorella La Guardia replaced Jimmy Walker and in Chicago where Anton Cermak pushed out "Big" Bill Thompson. Theater-goers were treated to newsreels of Mayor La Guardia taking a sledge hammer to slot machines and pushing them off the barge into the city's ocean dump. District Attorney Thomas Dewey ran an aggressive campaign against mobsters who were involved in gambling.
Crackdown on Organized Crime Sent Mobsters to California. The crackdown in the east had implications for California. Because of the pressure from law enforcement agencies, New York mobsters, including the infamous Benjamin "Bugsy" Siegel, moved to the West Coast. His role was to expand gaming and bookmaking operations for organized crime. Eventually, publicity was directed on him during an investigation of mob ties with the film unions, forcing him to move to Las Vegas.
At the same time, scrutiny also resulted in the closing of the floating casinos. The most famous was the Rex, a floating casino operated by organized crime that was anchored just outside the three-mile limit of state jurisdiction. Gamblers were taken out to Rex in excursion boats. The Rex and some gaming ships that operated out of San Francisco Bay were eventually closed down by law enforcement authorities.
Nevada Legalized Most Forms of Gambling in the State in 1931. The Nevada Legislature was motivated to build on the tourism boom that was expected in the wake of the completion of Boulder, now Hoover, Dam. Nevada had a flourishing, albeit illegal, gambling industry prior to the legalization. The move for making gambling legal also grew out of concerns that the flourishing illegal gambling was corrupting law enforcement and prohibition was unenforceable.23 Gaming in Nevada struggled from its inception until after World War II, when the prosperity of post-war America started a boom in the fledgling industry.
The Nevada gaming industry was helped by events in California. As stated, the gambling ships that used to leave from California ports were shut down. Municipal reform in Los Angeles kicked out many of the thriving illegal gambling businesses. These establishments were run by organized crime who moved to Nevada where their skills were desperately needed to launch the new legal gambling industry.
Organized Crime Syndicates Were Early Supporters of Gaming and Invested Heavily. Many casinos in Nevada were financed by mobsters. Most notable perhaps was Las Vegas' Flamingo which was opened in 1947 by Bugsy Siegel. Even though he had an extensive and violent criminal record, Bugsy Siegel was able to get a gaming license. Most notable of his criminal exploits was his role in arranging the murder of New York mobster "Dutch" Schultz by the infamous "Murder Inc." Today, even the hint of any such activity would be sufficient to deny a license.
Part of the reason for Mr. Siegel's success was due to his connection to the underworld. Wartime shortages did not slow down his plans because of his ties to the black market and his political connections.24 The lavish casino he built opened with such stars as Jimmy Durante, Xavier Cougat, and George Raft. The Flamingo helped establish Las Vegas, rather than Reno, as the destination for high rollers. Reportedly Mr. Siegel used too much of the mob's money on what was initially a unprofitable operation. Within the year, Mr. Siegel was gunned down at a Beverly Hills mansion.
Senate Investigated Mob Influence in Casinos. During the 1950s, the Senate Committee to Investigate Organized Crime in Interstate Commerce held a number of hearings on criminal influence in the casino industry. The committee was chaired by Senator Estes Kefauver, and the committee is also known by his name. The committee found widespread evidence of skimming, which sheltered gambling profits from taxes. The prevalence of crime left gaming once again on the verge of a national prohibition.25 The result of the committee's findings was a crackdown on criminal influence and a cleansing of the casino industry. Eventually, the mob sold their casino interests to lawful individuals and publicly-traded companies.
The link between organized crime and gambling was a factor in four state elections on legal gaming.26 In 1950, voters in California, Montana, Arizona, and Massachusetts voted against legal casino gaming. The California proposition would have established a state board to run all gaming operations with the proceeds going for old-age benefits. It lost by a wide margin.
Lotteries Begin Their Resurgence. From 1894 to 1964, there were no legal government-sponsored lotteries operating in the United States. This ban led to a paradox: lotteries were widely played, but always illegal. One of the most well known was the Irish sweepstakes which began in 1930 for the purpose of raising money for hospitals in Ireland. Although it was not legal to sell tickets in the U.S. or to ship them here, they were smuggled into the country. Participation was high with about 13 percent of the country having ever bought a ticket.27
Another prominent form of lottery was the illegal "numbers" game. Despite the illegality, numbers was quite popular. One author claimed that the amount being wagered on numbers was $5 billion in 1960.28 Another estimate shows that the numbers game was grossing $20 million annually in Chicago alone during the early 1970s and the total handle was $1.1 billion.29
Growing opposition to tax increases was a leading factor in establishing state-run lotteries in the 20th century. In 1964 New Hampshire was the first state to sponsor a lottery, followed by New York in 1967. New Jersey launched the first financially successful modern lottery in 1971. The New Jersey lottery was successful because it stressed frequent action at low cost, and it returned a higher percentage of lottery revenues as prizes. There were also various attempts to legalize a national lottery, but they failed to be passed by Congress.
In 1978, New Jersey became the second state to legalize casino gambling in an attempt to revitalize the rundown resort area of Atlantic City. The legalization was restricted only to Atlantic City. In the late 1800's to the early 1900's, Atlantic City was a popular resort town, boosted by the new rail service which linked the Northeast. Day trips to the Jersey shore were now possible and affordable. But its popularity dwindled when air travel became easily accessible. Upscale tourists chose beach resorts in Florida, the Bahamas, and the Caribbean over Atlantic City. Visitors to Atlantic City in the 1960's and 1970's were generally elderly and/or poor. Casino gaming was expected to be a way for Atlantic City to become a popular tourist destination once again.
What Could End Gambling's Third Wave? The first and second waves ended in part because of a resurgence of public concern about morality and scandals in gaming. People can live with adverse odds but not cheating.30 What kind of events could lead to scandals today? If lotteries were plagued by fraud that would probably have an impact on people's perceptions. Another route is through problems and scandal in sports gambling. Pete Rose is a symbol of what gambling can do to a person. What happens if a sports hero is more interested in winning a bet than a game? Could such a scandal impact legalized gaming?
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