The Business of Black Market Bribery

In 1937, a district attorney ordered an investigation of corruption in the SFPD. San Francisco was a pretty lawless place back then; houses of prostitution and gambling operated open and abundantly so long as they made monthly payoffs to the police force. There were so many brothels that in North Beach, tenants placed signs on their doors announcing they were private residences – to prevent the gentlemen callers from calling.

The typical tribute payment was $250 a month for a brothel, and $100 for a bookmaker. Adjusted for inflation, that’s about $4200 and $1700. That seems high! The nominal cost of ignoring an illegal establishment is zero, and I would expect police graft to be subject to competitive forces. Establishment operators who find themselves excessively shaken down could simply pack up and move to another officer’s beat.

Decentralized resource control is necessary but insufficient for a functioning economy. There also has to be some price system for communicating personal knowledge. Cops can’t walk around advertising their bribery rates (although I wish they would) so corruption is best handled collectively.

As a result, black markets tend to be monopolized markets. Ultimately, San Francisco’s vice industry was controlled by a couple of bail bondsmen who determined the price of payoff. The police department had to make regular arrests to keep their numbers up, and those who were up to date on their tribute payments would get a quick release while the holdouts were left in jail.

This all would have continued indefinitely, except that one prominent madam began listing police payoffs as a tax-deductible expense. This led the IRS to come after the SFPD for undeclared income, which prompted the whole investigation. See, even tribute collectors have to pay their tribute.

See Also:
1937 Police Graft Report by Edwin Atherton

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