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Lotteries as Public Finance



These days, when we want to fund building a public project such as roads, bridges, schools, etc., governments usually to look to issuing bonds, raising taxes, or imposing fees to pay for the construction. However, this has not always been the case. Up until the early-to-mid 19th Century, credit was not easily available (more about this in our next post) and, at least in North America, there were few “concentrations” of capital that could support lending from a single source. As a result, community leaders/governments were apt to set up and run a lottery to raise the funds.


Our post today will look at the origins of lotteries, their history as a source of finance in Europe and the British Isles, and then their introduction, increase in use for public finance, and their decline, in the American Colonies and the Early United States.


Origins

Sortition (also known as selection by lottery, selection by lot, allotment, and several other names) is the choice of political officials as a random sample from a larger pool of candidates. The system is designed to ensure that all competent and interested parties have an equal chance of holding public office. It also works to combat factionalism, since there would be no point making promises to win over key constituencies if one were to be chosen by lot, while elections, tend to foster it. In ancient Athenian democracy, sortition was the traditional and primary method for appointing political officials, and its use regarded as a principal characteristic of democracy. Ancient Greek mythology claimed that Zeus, Poseidon, and Hades used sortition (drawing of lots or a “lottery”) to decide who ruled over which domain. Zeus got the sky, Poseidon the sea, and Hades the underworld.

A Roman Dinner Party

During the Roman Empire, lotteries were held primarily as an amusement at dinner parties. Each guest would receive a ticket, and prizes would often consist of fancy items such as dinnerware. Every ticket holder was assured of winning something. This type of lottery, however, was no more than the distribution of gifts by wealthy noblemen during the Saturnalian revelries. The earliest records of a lottery offering tickets for sale is the lottery organized by Roman Emperor Augustus Caesar (27BC – 14AD). The funds were for repairs in the City of Rome, and the winners were given prizes in the form of articles of unequal value.


Early Modern Europe

In early modern Europe, the first lotteries were to finance major government/state projects or for charitable purposes, thus distributing part of the money to the winner, and another part to these projects. The Low Countries (Belgium, the Netherlands, and Luxembourg), held the first lotteries to offer tickets for sale with prizes in the form of money in the 15th century. Various towns held public lotteries to raise money for town fortifications, and to help the poor. A document dated 9 May 1445 at L'Ecluse refers to raising funds to build walls and town fortifications, with a lottery of 4,304 tickets and total prize money of 1737 florins (worth about US$170,000 in 2014). In the 17th century in the Netherlands, it was common to organize lotteries to collect money for the poor or to raise funds for a wide range of public usages. The lotteries proved immensely popular and hailed as a painless form of taxation. The English word lottery derives from the Dutch noun "lot" meaning "fate".

Belgian Lottery Booklet - 1617

France

King Francis I of France discovered the lotteries during his campaigns in Italy and decided to organize such a lottery in his kingdom to help the state finances. The first French lottery, held in 1539, the Loterie Royale, was authorized by the edict of Châteaurenard. This attempt was a fiasco since the tickets were very costly and the social classes which could afford them opposed the project. During the two following centuries lotteries in France were forbidden or, in some cases, unofficially tolerated.


Italy

The first recorded Italian lottery, held on 9 January 1449 in Milan, was organized by the Golden Ambrosian Republic to finance the war against the Republic of Venice. However, it was in Genoa that “Lotto” became popular. People would bet on the name of Great Council members, drawn by chance, five out of ninety candidates every six months. This kind of gambling was called Lotto or Semenaiu. When people wanted to bet more often than twice a year, they began to substitute numbers for the candidates’ names and the modern form of lotto was born.


German-speaking countries

The first big lottery on German soil was held in 1614 in Hamburg. In Austria, the first lottery was drawn in 1751, during the reign of Empress Maria Theresia, and was named Lotto di Genova since it was based on 90 numbers.


Spain

Spain set up its national lottery as a charity in 1763 during the reign of King Carlos III. Its goal later became to shore up state coffers. Spain’s first “Christmas Lottery” took place on December 18, 1812 in Cádiz, when the government set it up to raise money for the Spanish troops fighting against Napoleon's armies. Back in the day, a single lottery ticket cost 40 reales, which would equal out to only six-euro cents in modern currency. It did not become known as the Christmas Lottery until 1892 and it continues today.


England, 1566–1826

Although the English first experimented with raffles and similar games of chance, the first recorded official lottery, chartered by Queen Elizabeth I in the year 1566, was drawn in 1569. This lottery was intended to raise money for the "reparation of the havens and strength of the Realme, and towardes such other publique good workes". Each ticket holder won a prize, and the total value of the prizes equaled the money raised. Prizes were in the form of silver plate and other valuable commodities. Scrolls, posted throughout the country showing sketches of the prizes, promoted the lottery. Since the payout equaled the monies paid in, the money received from this lottery was an interest free loan to the government during the three years that the tickets (“without any Blankes”) were on sale. In later years, the government sold the lottery ticket rights to brokers, who in turn hired agents and runners to sell them. Since most people could not afford the entire cost of a lottery ticket, the brokers would sell shares in a ticket; this resulted in tickets being issued with a notation such as "Sixteenth" or "Third Class".

Advertising Flyer for the 1656-58 English Lottery

Officials also chartered private lotteries, for various purposes. In 1612, King James I granted the Virginia Company of London the right to use a private lottery to raise money to help support settlers in the first permanent English colony at Jamestown, Virginia. The prize was 4,000 crowns, a good amount of money in those days, but even so, the company was not successful at selling tickets in London. In 1616, the company sent people on the road to sell tickets in “instant” lotteries outside of the capital. In these small-scale games, people could find out if they won a prize immediately after buying a ticket, like scratch-and-win lotteries today. These “instant” games were an enormous success. Over the next four years, they brought in an estimated £29,000—nearly £8 million today.


The English State Lottery, which began in 1694 and continued until 1826, ran for over 250 years. Finally, the government, under constant pressure from the opposition in parliament, declared an end to the lottery, with a last draw in 1826. Contemporary opponents ridiculed this lottery as "the last struggle of the speculators on public credulity for popularity to their last dying lottery".


Colonial Period and the Revolutionary War

Lotteries in colonial America played a significant part in the financing of both private and public ventures. A 1720 lottery ad in the Philadelphia newspaper American Weekly Mercury promised the winner “A new brick house, corner of Third and Arch.” Tickets to win the house were 20 shillings each.

18th Century Lottery Sales Office

Between 1744 and 1776, various governmental entities sanctioned more than 200 lotteries, which played a significant role in financing roads, libraries, churches, colleges, canals, bridges, etc. Lotteries also funded some of the United States’ earliest and most prestigious colleges, such as Harvard (1636), William and Mary (1693), Yale (1701) and Princeton (1746), as was the University of Pennsylvania (1755).


In the late 1740s, Benjamin Franklin organized a lottery to raise £3,000 to purchase cannons for the defense of Philadelphia. During the French and Indian Wars, several colonies used lotteries to help finance fortifications and their local militia. For instance, in May 1758, the Commonwealth of Massachusetts raised money with a lottery for the "Expedition against Canada". Several of these lotteries offered prizes in the form of "Pieces of Eight".


One lottery, the Mountain Road Lottery organized by several prominent Virginiana including George Washington in 1768, was an attempt to raise funds to build a road through the Allegheny Mountains in Virginia and to construct a resort in the area now known as Hot Springs, Virginia. It was unsuccessful. John Hancock, on the other hand, was successful in using a lottery to finance the rebuilding of Faneuil Hall in Boston after it burned down in 1761. In the 1760s George Washington often took part in tavern lotteries, events to settle defaulters' debts by raffling off their assets to a high-spirited crowd. In 1769, Washington co-managed a tavern lottery in which fifty-five slaves, among them six families and five females with children were part of the prizes.

Connecticut Lottery Ticket - 1753

Even with slaves used as prizes, the lottery was sometimes a source of more than pain for enslaved people. If a slave won the lottery, it could also be a beacon of hope and (very rarely) freedom. It was difficult for slaves to accumulate the funds needed to buy their freedom on the normal marketplace. However, although the odds of winning were low, a lottery ticket was within their price range. One such person who bought his freedom in just this way was Denmark Vesey. He went on to live for more than two decades as a free man in Charleston, South Carolina, until 1822, when he was hanged for allegedly organizing slaves to burn the city down and kill all white people.


The lottery trend continued quite actively throughout the Revolutionary War and the Confederation period. One of the most significant developments was the creation of “national” lotteries organized by the Continental Congress. However, in stark contrast to the success lotteries found on the state and the local levels, the national lottery was a dismal failure. On November 18, 1776, the Continental Congress enacted a national lottery in four classes, consisting of 100,000 tickets in each class. This seemingly well designed, elaborate lottery was calculated to bring the Congress $1,500,000 from the four classes, a considerable amount of money in 1776.

1776 Congressional Lottery Ticket

Sales of tickets for the first-class lottery were far slower than expected as distribution problems in selling and publicizing the lottery was a significant issue throughout the country. This forced the lottery officials to postpone the drawing several times. Finally, on May 1, 1778, the drawing began with only 20,433 of the 100,000 tickets sold. When officials drew the final tickets on May 27th, with about 36,500 of the $10 tickets sold. the losses came to over $72,000 since the unsold tickets were owned by the government. These losses continued with the other classes of the lottery for a host of mismanagement reasons, but most importantly, the depreciated value of the continental dollar during these years compounded the problem. The final calculation for the government’s winnings from the entire lottery was less than $100,000, a small fraction of the expected proceeds of $1,500,000.


The Early Republic

The late eighteenth and early nineteenth centuries were times of great demand for all types of “internal improvement”. In early America, this term had an expansive meaning, including within its scope any endeavor that contributed to the “security, prosperity, and enlightenment” of the American people. Thus, when early Americans set themselves to finding prospects for internal improvement, their designs ranged beyond roads, canals, and bridges to include the construction of schools, meetinghouses, and commercial facilities.

Fredericksburg VA Lottery Flyer - 1804

Public lotteries, like subscriptions and investment devices, offered a way to aggregate monies voluntarily given by many contributors. Furthermore, lotteries combined the characteristic advantages of these two alternatives. Like subscriptions, lotteries could be started on an ad hoc basis. Like investment devices, lotteries could stimulate willingness to contribute through the promise of financial reward. As a result, lotteries were widespread in the early American republic. Reports show that, in 1832, eight states held 420 lotteries in the previous year.


From 1796 to 1808, the Pennsylvania legislature chartered seventy-eight schemes, mostly to expand the state’s budding transportation system. Framing their work as a public good, managers adorned tickets and broadsides with images of national progress: schools, churches, roads, bridges, and canals.


Despite these overt claims to the commonweal, a series of controversies starting in 1811 contributed to the public’s growing belief that lotteries were less about civic initiative and more about profiteering. In 1811, Pennsylvania lawmakers chartered the Union Canal Lottery to raise $340,000 to revive a moribund canal project linking the Schuylkill and Susquehanna Rivers. Between 1811 and 1833, the lottery distributed $33 million in prizes but raised only $124,000, prompting allegations of waste and corruption by its managers.


In Rhode Island, in the first quarter of the 19th century, lotteries—much like those of the previous century—continued to support the infrastructure of the state’s roads, toll-roads, bridges and wharves, as well as its churches, libraries and Masonic halls. However, during the second quarter of the century, lotteries were almost exclusively used for public schools. Interestingly, unlike the 18th century, there were no lotteries for the financial relief of individuals.


From 1800 to 1825 the General Assembly granted nearly seventy lotteries. Among them were two unusual lotteries to explore for coal, one on Aquidneck Island and the other in Cumberland. Both were granted in 1812. It was later quipped that the coal discovered on Aquidneck Island would not burn in hell.


The concept of a lottery for the support of public schools was first presented in Newport with the Long Wharf, Hotel and Public School lottery in 1798. But it was not until 1828 when the Rhode Island General Assembly passed an act providing for the support of free public schools that a statewide initiative took effect. From 1828 on all lottery grants, with one exception, had provisions for some proceeds going to public schools.


Newspapers of the period of the period reported: “The lottery mania appears to rage with uncommon violence. It is said that there are nearly twenty lotteries on foot in the different States. The sale of tickets has been uncommonly rapid Lotteries have been formed, published, and the tickets sold and drawn in the course of ten or fifteen days” (Pennsylvania Mercury, August 24, 1790) and “Every part of the United States abounds in lotteries” (Columbian Centinel, January 22, 1791)


The following partial list of lotteries and their purposes, taken at random from a few of the newspapers for the years 1789—'91, points to the truth of the statement:


West River Bridge Lottery, Brattleborough; Vermont Journal, September 2, 1789.

Furnace Lottery, Fair Haven Iron Works, Vermont Journal, January— September 1789.

Windsor County Grammar School Lottery, Vermont Journal, December 2, 1788.

Massachusetts Semi-Annual Lottery, Massachusetts Spy, September 1790.

Massachusetts Monthly State Lottery, Massachusetts Spy, September 1790.

Leicester Academy Massachusetts Spy, September 1790.

Charlestown Lottery; Boston Gazette, December 1790.

Marblehead Lottery; Columbian Centinel, November 1790.

East Hartford Glue Works Lottery, Connecticut Courant, December 7, 1789.

Hartford Bank Lottery, (to build a bank along the Connecticut River at Hartford), Connecticut Courant, November 1789.

River Bank Lottery, (to build a bank on the river next to the public road through the Longmeadow in Middletown), Connecticut Courant, April 1790.

Providence Great Bridge Lottery Columbian Centinel, December 1790.

Bell Lottery (to buy bells for German Reformed Church; Maryland Journal, January 2, 1789.

Petersburg Church Lottery, Virginia Gazette, September 27, 1792

Alexandria Presbyterian Church Lottery, Virginia Gazette and Alexandria Advertiser, January 1791.

Alexandria Lottery to pave certain streets; Virginia Gazette and Alexandria Advertiser, April 22, 1790.

Fredericksburg Academy Lottery, Virginia Gazette and Alexandria Advertiser, June 1791.

Pine lottery, (for the sale of Real Estate and Paintings), Pennsylvania Gazette, November 1789.

Lottery to enable the Hebrews to remove the debt on their synagogue, Pennsylvania Journal, October 8, 1790.

Lottery to build a City Hall at Philadelphia, Pennsylvania Packet, December 1789.

New York City Lottery (to enlarge the City Hall for the use of Congress), New York Journal, March 18, 1790.

New Haven Glass Works Lottery; Connecticut Journal, December 1790.

Lottery for extending and improving the Woollen Manufactory at Hartford, Connecticut Journal, April 1791.

New Haven Long Wharf Lottery, (granted in December 1790), Connecticut Journal, April 1791.

Flyer for 1818 Lottery in Pennsylvania

One lottery in particular, the National Lottery, caused problems and was crucial in undermining the public trust in lotteries in that it brought to light the prevalent issue of crookedness amongst the lotteries in the United States. This lottery, created by Congress for the beautification of Washington, D.C., was administered by the municipal government. From the beginning, there were problems.


Philip and Mendes Cohen were brothers who managed the Norfolk branch of Cohens Lottery and Exchange Office of Baltimore. The firm had been set up in 1812 by another brother, Jacob I. Cohen, Jr., a future president of the Baltimore City Council, who had emigrated from Bavaria and brought each of his five brothers into the firm. On June 1, 1820, authorities in Norfolk charged Philip and Mendes Cohen with selling tickets for the National Lottery in Virginia. A local court convicted the brothers and fined them $100. Because their firm had a reputation for honest dealing and paying out quickly, the Cohens decided to challenge the conviction all the way to the US Supreme Court. The case pitted Virginia’s law restricting sales of lottery tickets to only those of Virginia, against the US Congress who had chartered the National Lottery and authorized the sale of tickets in all states. The Supreme Court trial resulted in a landmark decision in Cohen vs Virginia. Unfortunately for both the Cohens they lost their case and the conviction stood. They were not the only looser in this lottery, however. The organizers absconded with the proceeds and those who bought tickets and won were never paid.


The Decline and Demise of Lotteries

Beginning in the 1830s, evangelical reformers began denouncing lotteries on moral grounds and petitioned legislatures and constitutional conventions to ban them. They argued that “the poorest people were spending their time and interest to purchase tickets” and that the burden of lotteries fell most heavily on the “poorer classes . . . because they are the least informed of the slender chances of succeeding and because success has to them its greatest relative importance”. Coupled with this were more traditional religious concerns that lotteries might be an evil practice in and of themselves. Religious campaigners at the time claimed the consequences of gambling, including lotteries as “a total loss of character, gross licentiousness, poverty, ruin, and even suicide”. Recurring lottery scandals and a general backlash against legislative corruption following the Panic of 1837 also contributed to anti-lottery sentiments.


Another factor that contributed to the decline of lotteries as a means of financing public infrastructure was the growth of banking and investment institutions in the United States. While few banks had existed before 1780, over 58 new state banks were chartered between 1801 and 1811, and over 120 state banks between 1811 and 1813, making capital for public projects more available. At the same time, the nation saw the emergence of investment banking firms that specialized in selling securities of canals, railroads, and state governments to European investors. Between 1820 and 1841, twenty of the thirty-one states borrowed close to $200 million for infrastructure development, much of it from European investors. This all combined to convince the public to outlaw lotteries. From 1844 to 1859, 10 new state constitutions had lottery bans and by 1860 all states had prohibited lotteries except Delaware, Missouri, and Kentucky.


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References


Ashton, John. A History of English Lotteries. London: The Leadenhall Press, Ltd., 1893.


Dasgupta, Anisha S. "Public Finance and the Fortunes of the Early American Lottery." August 2005. Yale Law School Legal Scholarship Repository. 2 February 2021. https://digitalcommons.law.yale.edu/student_papers/9/.


Ezell, John Samuel. Fortune's Merry Wheel: The Lottery in America. Cambridge: Harvard University Press, 1960.


Larson, John Lauritz. Internal Improvement: National Public Works and the Promise of Popular Government in the Early United States. Chapel Hill: University of North Carolina Press, 2001.


McMaster, John Bach. A history of the people of the United States, from the Revolution to the Civil War. Vol. 1. New York: D. Appleton and Company, 1924. 8 vols.


Willman, Gerald. "The History of Lotteries." 3 August 1999. willman.com. 02 February 2021. http://willmann.com/~gerald/history.pdf.





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