Why does the average drinker consume alcohol? There are plenty of reasons, one of which is social. Alcohol, while inhibiting clarity, precision, and discretion, is a social lubricant. If you’re one of those drinking, then it’s enjoyable to be around other drinkers. Also, people build the habit of drinking *something* while socializing. We all know that prohibition resulted in bootlegging and tainted cocktails. But what were the legal alternatives? One was that you could purchase grape juice and make your own wine (that’s a story for another time). Another is to switch to another drug.
Alcohol is a depressant and arguably the most popular one in the US. It’s not a clear substitute for alcohol in terms of its direct effects on the body. However, it’s a liquid, safe, and tasty. That make is a good candidate for satisfying the physical urge to imbibe. But, importantly, it is also a social drug. People would get so hopped up on coffee and feed off of one another’s high that Charles the II of England banned coffee houses in order to prevent seditious fomentation. This brings us to an important characteristic of coffee. It’s a stimulant. You’d think that a stimulant would not be a substitute for alcohol. If anything, one might think that they are complements. Coffee helps to provide that kick in the pants after having an enjoyable night. But, the social feature makes coffee a good candidate to substitute alcohol, should the times be dire.
Illegal activity aside, people wanted an outlet for their physical and social proclivities. They wanted intoxication. Coffee provided exactly that. Conveniently, the continental US didn’t grow any of its own coffee. That means that imports and domestic consumption have a tight relationship.
US national prohibition of alcohol began in January of 1920 and the full version of it last until March of 1933 when it was partially repealed for low ABV beverages. Prohibition was fully repealed in December 1933.Using the tools of microeconomics, we can regress the log of monthly coffee import volumes on time and add an indicator variable for prohibition. A sample period of 1900.01-1933.02 seems reasonable. The graphical results are below.
Coffee imports during prohibition were about 14% higher than the pre-prohibition trend. Those results look pretty nice. Unfortunately, a simple OLS regression makes some inaccurate assumptions about our data. Specifically, each observation is not independent. Indeed, each observation has a strong correlation with the value in the month prior – the values are serially correlated. Also, maybe the effect of prohibition wasn’t constant. It’s time that we look for another way. Come with now to the dark side, where we address this problem with time series statistics (we have coffee!).
We can run a simple 4-month lagged vector autoregression of logged coffee imports and our prohibition indicator variable. An autoregression on our indicator variable will explain almost all of its variation. After all, it’s zeros before and then ones during prohibition. The variation in that indicator variable is very well explained by its lagged values in all except for one moment. January of 1920 is the first period that the indicator flips from a zero to a one. That’s where there is a big residual. Now we can ask, a couple of questions. First, when there is a n unexpected shock to coffee imports, how long does it take for the imports to return to normal? According to the below orthogonalized impulse response function (or just IRF), it takes just over two years for an import shock to fade away into history.
That’s the benchmark. Now we can ask: what was the *initial* effect of prohibition on coffee consumption? Below is the IRF that illustrates the initial effect of prohibition on coffee imports. Within about six months coffee consumption rose by 7%, reaching 9% by 19 months later.
So, when faced with higher costs to obtaining alcohol, people switched to a substitute. Not a substitute for their desire for depressants, but a substitute Schelling point around which they could gather. People feel awkward just hanging out. We feel like we need a reason. And feeding or providing libations to your company helps to make actionable the simple desire for social and physical proximity.
I don’t want you to leave with the wrong idea. The great depression did not usher in the modern era of the US as a coffee consuming people. Unlike many national policies, prohibition ended. People could drink alcohol once more. If the public eschewed coffee at the end of prohibition, then that would pretty well seal the case that the rise in coffee consumption was a direct effect of alcohol prohibition. Below is the IRF using the sample from 1920.01 – 1941.06. Eschewal is exactly what happened. You can even see that period of partial repeal with the larger standard error in the immediate months. Within nine months, however, coffee imports fell by 11%, remaining 8.8% lower by two years later. America returned to its social drug of choice.