The years after the Civil War were a wild time in America. The Industrial Revolution brought new wealth, huge economic swings, mass immigration, urbanization, speculation… and a lot of corruption. The country was busy trying to pick itself back up, money was flying around, and we essentially had one-party rule, since the Democrats’ alignment with the South had left them on the political sidelines. It was the Gilded Age, but it wasn’t pretty. If you were a shrewd (read: morally lacking) operator, though, you could do pretty well for yourself.
John McDonald was exactly that kind of operator. Persevering and confident, McDonald went from Union officer to businessman to supervisor of internal revenue despite being completely illiterate. This was during the Grant administration, when your war record and Republican loyalty was more important than your actual suitability for the job. McDonald took the revenue gig not because he had some calling to public service, but because it seemed like a path to the kind of influence that can make you a lot of money – legally or illegally. He was posted to Saint Louis, both to supervise revenue collections and to do whatever he could to help with Grant’s upcoming reelection bid (Missouri was a likely swing state). He quickly realized that he could help the President’s cause and his own at the same time.
The war had brought a need for revenue, and as was the case after the Revolutionary War and the War of 1812, the first place the government looked was in the liquor cabinet. A spirits tax was introduced in 1861, raised a few times, and kept in place when the war ended, since there were still lots of debts to pay. Soon it wasn’t about the debt anymore, but about funding a rapidly-expanding federal government reliant on the money. By the late 1860s the tax was pretty high – far higher, when adjusted for inflation, than federal liquor taxes are now.
McDonald, recognizing that substantial cash would be needed to keep Missouri in Grant’s camp, hatched a scheme to extract it from distilleries. In Washington he met with Grant’s close friend and personal secretary, Orville Babcock, and together they put the plan into motion. It was simple enough: revenue agents (new ones, put in place by McDonald) would stamp whiskey barrels as taxed when they hadn’t been, or would put down that 1,000 gallons had been shipped when it was really 2,000. The distiller would give some of the unpaid tax money to McDonald and his co-conspirators, and would pocket the rest. The conspirators used some of their share to fund/buy Grant’s successful 1872 reelection, and kept the rest for themselves.
The scheme, which came to be called the Whiskey Ring, survived a rather remarkable four years, taking about $6 million off the tax rolls. In an era defined by self-interest, there just weren’t many people who couldn’t be paid to look the other way. Finally, the lavish habits of the Ring’s key members caught the attention of the Treasury Secretary, who got a liquor industry reporter to keep track of incoming and outgoing shipments at a few distilleries. It wasn’t long before McDonald was arrested and an investigation began that led all the way to the White House. Grant was famously oblivious to what his staff members were up to, and even testified in Babcock’s defense, unwilling to believe that his close friend had been so tied up in scandal. The Whiskey Ring was one of several incidents that would tarnish his presidency and contribute to a distrust of government that would last for the rest of the century.
The Ring was also fuel on the fire of the Prohibition movement. As Reid Mitenbuler puts it in Bourbon Empire: “For an industry that peddles a drug, maintaining a good image is crucial. The Gilded Age years provided a wellspring of ammunition… for Prohibition advocates who would begin making their strongest case during this period. Whiskey’s image was given no favors by the fact that at the beginning of the era it was also the lifeblood of the era’s most outrageous political scandal.”
Mitenbuler points to a lack of regulation – and of protections for legitimate, law-abiding distillers – as the cause of whiskey’s involvement in this scandal and other, lesser incidents of the era. Slowly, over the next few decades, with bonding laws, definitions, and other regulations, that would start to change, but it would be too little, too late to stop Prohibition.
John McDonald and the Whiskey Ring, by Edward S Cooper: https://books.google.com/books?id=QKE9DQAAQBAJ&printsec=frontcover#v=onepage&q&f=false
The Secrets of the Internal Revenue by Franklin Eliot Felton: https://archive.org/details/secretsinternal00feltgoog/page/n9
Secrets of the Great Whiskey Ring by John McDonald (yep, the McDonald at the center of the scandal): https://archive.org/details/secretsinternal00feltgoog/page/n9
Grant, Babcock, and the Whiskey Ring by Timothy Rives, in the National Archives’ journal Prologue: https://www.archives.gov/publications/prologue/2000/fall/whiskey-ring-1.html
Bourbon Empire by Reid Mitelbuler (Pp. 111-116. Quote from p. 112)