Saturday, January 16, 2016

America: Built by Lottery

Listen to a podcast of these episode.

With the recent record $1.6 Billion Powerball lottery over now, I got to thinking about the history of lotteries.  They can be traced back to ancient times, with examples all over the world and throughout most of human history.  Today I thought I would focus on the history of lottery in creation of the United States and its rebirth in modern times.

Lottery to finance Jamestown, Virginia

The first permanent British Colony in America, Jamestown Virginia, relied on financing from wealthy investors, the 17th Century equivalent of venture capitalists.  But the colony was slow to show a profit and investors were loath to continue dumping more of their own money into the venture.  So, the financiers received permission from King James to hold a lottery for The Virginia Company.

The First Great Standing Lottery took place in March 1612. Players could purchase a ticket for 2s. 6d. That is two shillings and six pence. Under the old system of British currency, one pound (£) equaled 20 shillings (s) or 240 pennies (d) - "d" being used from the Latin "denarius".

Tickets were not cheap.  A common laborer would usually earn less than on shilling per day.  But the prizes were also valuable.  The lottery offered a variety of prizes worth a total of £5,000.  These included a "fayre plate" worth £1,000, more than a common laborer would earn in a lifetime.. Still, the lottery was not as successful as hoped.  The drawing which had been scheduled for May had to be postponed until the end of June.  The lottery had not sold enough tickets, in part because of rumors of a fixed result.  In the end, the lottery did help raise desperately needed funds for the colony.

The company held smaller lotteries, known as the "Little Standing Lottery" throughout 1612 and 1613. Tickets were a mere 12d, with smaller prizes .  At the same time, the company started the Second Great Standing Lottery during the summer of 1612, with a hefty 5s ticket.  Ticket sales took over three years, with the drawing finally held on November 17, 1615.

In 1616, the company began "running lotteries." Rather than waiting for a final drawing day, running lotteries allowed people to draw lots which meant they could win a prize immediately or nothing. These were the equivalent of modern scratch off tickets.  The company sent its agents Gabriel Barbor and Lott Peere, travelling throughout the country side to raise money.  The agents got the support of local authorities by providing personal gifts.  Gaining local support was critical to building trust that the games were honest.  Drawings were typically held in the presence of local officials, with a local child pulling the lucky lots.

Many of the details of these local lotteries are not available, but records for a 1618 lottery run in Leicester show the games lasted for six weeks. Players could purchase some of the forty thousand lots were available for sale at 12d. each, with chances to win over 1,500 prizes.  The total value of all lots was £2000, with about half that amount distributed as gifts and prizes.  By one estimate, the company's profit for this one lottery was £961, an amount that would pay for an entire ship's voyage to the new world.

The Virginia Company reported £7,000 in lottery earnings for 1619, the bulk of its total cash on hand in 1620: £9,831.  Clearly lotteries were a profitable business, covering much of the expenses the Jamestown colony that continued to hemorrhage cash.

There were, of course, critics to allowing this private company to raise such fortunes.  Some critics focused on claims of cheating and corruption.  But a prime complaint was simply that wealth was being sucked out of the working poor who could least afford it.

Sir Lionel Cranfield spoke about this in the House of Commons on February 24, 1621: "I am of the Company of Virginia, but I hear these lotteries do beggar [impoverish] every country they come into. Let Virginia lose rather than England."  Public criticism of the lottery grew louder and the King eventually shut down the lotteries.

Colonial Lotteries

Colonial lotteries began to take shape in the mid-1700's.  Massachusetts had already subjected its citizens to heavy poll taxes and estate taxes and was still struggling to pay its bills.  Despite a strong Puritan opposition to gambling of any sort, the Colony decided that it would hold a lottery to raise funds in 1745.

The Colony planned to sell 25,000 tickets at a cost of 30s (£1.5) per ticket.  The lottery would be overseen by a Board of Directors made up of leading figures in the colony: Samuel Watts, John Quincy, James Bowdoin, Robert Hale and Thomas Hutchinson.

Massachusetts Colony lottery ticket.
The process of selection seems rather complicated.  Each player received a numbered ticket, one to keep and one put in a box.  All 25,000 tickets were placed on one box.  25,000 more tickets were placed in a second box.  On drawing day, officials would draw one play ticket and one prize ticket from each box.  If the prize ticket was blank, the player got nothing.  If the ticket contained a prize, officials would write the player's name on a list for payment of the amount won.  This process meant hand drawing all 50,000 tickets to determine the winners, a rather lengthy process.

The total amount collected from the sale of all tickets was £37,500.  Prizes ranged from two top awards of £1250, to 5250 awards of £3,15s (about double your money back).  There were a total of 5422 awards, meaning your chances of winning something was about 25%.  To total amount awarded as prizes was £37,500.  But wait, you may ask yourself.  If total tickets sales was £37,500 and total award money was £37,500, how did they make money?

The answer is with taxes.  Each award came with a 20% tax, meaning the winner only received 80% of the award amount.  Total collections from taxes would be £7,500, minus the costs of running the lottery.

According to the rules set up by the legislature, the lottery, which began selling tickets in January, had to hold the drawing on or before April 9.  However, according to The Boston Weekly Post Boy April 8, 1745, the lottery had to be postponed until June 4th because there were still unsold tickets. Fears grew that the Colony might lose money if it had to pay out awards in excess of the amount collected from ticket sales.

Eventually, however, all the tickets were sold and the lottery drawing was started. The Boston Evening Post of June 10, 1745 mentioned the lottery drawing had begun several days earlier at Faneuil Hall, with the drawing still continuing.  Finally, on June 18, the Boston Gazette reported that the lottery office in Faneuil Hall had a record of all winning ticket numbers.  Anyone could could go to check their tickets.

Lottery Ticket, Signed by George Washington
Despite some trouble with timely ticket sales and the delays in completing the drawing, the lottery was generally considered a success.  It raised needed funds for the colony and people generally seemed satisfied with the fairness of it.  This seemed to be the beginning of lottery fever in the US.  Rhode Island held a lottery later that same year, the first of 82 lotteries that it would hold before the Revolution. Philadelphia held a lottery in 1748.  Soon lotteries became the preferred method of raising money for any public project.  Not all were run by the government.  For example, when George Washington headed a project to build a road in Virginia to a Mountain resort in development, he sold lottery tickets to finance the project.  The lottery itself turned out to be a disaster, but the tickets, with Washington's signature on them, have become valuable collector's items.  Some lotteries from this period even offered slaves as a prize to be won.

Nonexistent a generation earlier, Colonial lotteries popped up almost everywhere.  They financed a wide variety of projects, but also raising societal concerns.  In 1769, King George III outlawed all lotteries that did not have the Crown's explicit approval.  With that approval extremely difficult to obtain, lotteries in the colonies came to a halt.

Lotteries during the Revolution.

Well, the lotteries did not so much come to a halt, more like a short pause.  As the American Revolution got underway in the 1770's, colonies and later States at war with Britain no longer felt constrained by the King's decrees.  Numerous lotteries were commenced to finance the Revolution. Benjamin Franklin organized a lottery in Philadelphia to pay for canon.  In 1776, the Continental Congress attempted a $10 million lottery to help finance the war, though the project ended up floundering and was never completed.

As taxes were highly unpopular and often impossible to collect, lotteries became a good way of collecting money from the common population.  Alexander Hamilton, summed up the age old appeal of lotteries: “Everybody … will be willing to hazard a trifling sum for the chance of considerable gain … and would prefer a small chance of winning a great deal to a great chance of winning little.”

Early US lotteries

States continued to hold lotteries and allow private lotteries in some cases in the newly formed United States. Lotteries often supported special projects such the building of canals or public buildings. Some supported universities.  Thomas Jefferson received permission from Virginia to hold a private lottery late in his life in order to pay off some of his personal debts.  Although he died before the lottery could be held, it was eventually completed by his estate.

The federal government made no attempt to restrict lotteries.  In fact, it organized a few of its own. Congress created a national lottery to help pay for construction in the District of Columbia.  In fact, one of these resulted in a US Supreme Court case after Virginia tried to bar the sale of federal lottery tickets within the State.  Virginia wanted to retain a monopoly on lotteries.  The Court in Cohens v. Virginia (1821) sided with the State, holding that Congress had never intended the sale of tickets outside of DC.

Lotteries fall out of favor

Then, in the 1830's public opinion began to turn against lotteries. Several lottery scams helped turn public opinion against gambling.  Traditional religious opposition to gambling, combined with social reform movements that saw the cost of gambling with no real societal benefit caused many leaders to decide it was a harm to society that needed to be abolished.

In 1833, Pennsylvania, Massachusetts and New York banned all lotteries.  Other States soon followed.  By 1860, only three states still permitted lotteries: Delaware, Missouri, and Kentucky. Although it was illegal, many enterprises sold lottery tickets for these States throughout the country. After the Civil War, a federal law made it illegal to use the US mail to distribute lottery tickets.

But the reconstruction years were hard times.  In 1868, the Louisiana legislature was desperate for money.  Its notoriously corrupt legislature made a deal with a criminal syndicate from New York to create a State lottery with a 25 year charter, and establishing the syndicate as the sole lottery provider. The Louisiana Lottery became wildly popular throughout the country, despite restrictions on using US mail.  About 90% of its revenues came from out of state sales.  Louisiana soon became the only legal lottery in the US.  Finally in 1895, Congress barred any transmission of lottery tickets across State lines by any means.  With out of state sales becoming impossible, the Louisiana lottery was abolished.

With the death of the Louisiana Lottery, all States had outlawed lotteries.  Many had added such prohibitions to their State Constitutions.  For nearly three generations, Americans would not have any options to play the lottery legally anywhere in the US.

While legal lotteries disappeared, gamblers turned to organized crime for their lottery fix.  The "numbers racket" grew increasingly popular in many cities.  Most of these operated much like the daily lotteries run by States today.  A random three digit number would give a pay out, usually of 600 to 1.  Because no one trusted criminal syndicates to pick the numbers, and because they could not be picked in a public drawing, groups used relatively random numbers as the award.  One group, for example, used the last three digits of the published balance of the US treasury.  Another, used the last digit of dollar pay outs for win, place, and show for a particular local horse race.  These methods generated random three digit numbers that no one could easily manipulate.

Other Americans turned abroad.  The Irish sweepstakes began in 1930.  It derived most of its revenue from US purchases.  The importation and sale of such tickets in the US was illegal.  Nevertheless, the Irish Sweepstakes became wildly popular for many years.

Rebirth of the State Lotteries

Legal US lotteries remained nonexistent for decades.  Then, in 1964 New Hampshire decided to create a State lottery.  The age old desire to raise money without raising taxes make the lure of the lottery too tempting.  New Hampshire had no income taxes nor sales taxes and needed revenue.

NH Gov. John King purchases the first
legal lottery ticket of the 20th Century
(1964)
This, however, was not a simple task. In addition to the many State laws nationwide, there were numerous federal laws designed to prevent lotteries.  US officials did not want a replay of the Louisiana Lottery of the previous century where one state benefited from a lottery at the expense of all the others.  Not only were there federal laws against using the US mail to distribute any information related to lottery, but any interstate transportation of anything lottery related was banned.  This included restrictions on newspapers that carried lottery results, or announcement of any lottery information via TV or radio, and other criminal statutes that made it virtually impossible to create a working lottery.

New Hampshire attempted to avoid some of the anti-lottery laws by calling the new game a sweepstakes.  Winning numbers would be tied to random numbers generated from local horse racing results inside the State.  The State had to pay onerous excise taxes to the Federal government, designed to discourage such gambling.  All sales were done in state, mostly in liquor stores.

Nevertheless, the games enjoyed great popularity.  Tickets cost $3 for a chance to win up to $100,000.  Despite the strict bans on interstate transport of lottery materials or advertising, most tickets were sold to out-of-state customers from New York, Massachusetts, and elsewhere.  The most popular sales outlets sat right at the State border, where travelers could travel to buy their tickets.  New Hampshire tourism revenues boomed as many people traveled to New Hampshire primarily to buy lottery tickets as part of a longer vacation. The game was an overwhelming success.

Nationally, public opinion began to turn quickly.  There were still critics of this new legalized gambling which was not only permitted but encouraged by the government.  Many, however, saw the new lotteries as a way to take the numbers racket away from organized crime.  It also quickly became a tempting source of revenue to State officials.  Neighboring States began to develop lotteries of their own.  The New York Lottery began in 1969.  New Jersey followed in 1970.  Massachusetts began a scratch off game in 1974.

These new State lotteries created difficulties for federal officials since many of them seemed to be run in violation of federal anti-lottery laws.  In 1974, the Department of Justice considered criminal prosecution of some state officials whose lotteries were flouting federal law.  But popular opinion seemed squarely in support of State lotteries. Congress amended federal laws to exempt state run lotteries from federal anti-gambling laws generally.  With these changes to the law the DoJ dropped its investigations.

With the federal government no longer restricting them, lotteries grew and expanded at an accelerated rate.  New Hampshire, Vermont, and Maine formed the first multi-state lottery in 1985 in order to offer bigger jackpots and compete with lotteries in larger States.

Today, lotteries are nearly universal, 44 of 50 States have a State lottery.  Only Alabama, Mississippi, Utah, Nevada, Alaska and Hawaii don't have a lottery.  Multi-state games such as Powerball or Mega Millions have become billion dollar industries.  Lotteries enjoy massive popularity and appear to be here to stay.

Listen to a podcast of these episode.

Further Reading:

http://www.encyclopediavirginia.org/Virginia_Company_of_London - Early lotteries supporting the Jamestown colony.

http://www.coins.nd.edu/ColCurrency/CurrencyText/CLT.html - Early Colonial Lotteries.

http://www.naspl.org/index.cfm?fuseaction=content&menuid=11&pageid=1016 - History of Lottery Timeline.

http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=4158&context=clr0 - Cornell Law Review Development of the Federal Law of Gambling (1978).

https://books.google.com/books?id=mm25CgAAQBAJ - eBook American Sweepstakes by Kevin Flynn (2015)

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