There is a fascinating post up on Colins Ghost (in my opinion one of the best, well written blogs out there) on how the pari-mutuel system came to be. It is an amazing account on how it was not embraced immediately, and how it became mainstream.
Back in 1908: "The public is gradually becoming impressed with the fact that the average of odds returned through the machines is better than formerly, when the books were in operation."
It seems that bookmakers, if you were out to bet $2, would not give you a very good price (probably not unlike today in the UK and elsewhere, where bookies have a high take on longshots). It does appear that way back over 100 years ago, bettors were looking at prices as a part of their wagering.
Of particular significance, was that price. Yes folks, the takeout was 5%.
"When Kentucky initiated the mutuel system after 1906, the takeout stood at 5% — a figure that seems quaint today."
Oh my, what we'd be betting with 5% takeout. I have spot plays that are 0.90ROI and are red light plays. They would become immediate green light plays with a low takeout. Instead I don't bet.
Gambling expert Wil Cummings said in his report to the industry in 2003: "the racing industry fails to understand that when raising takeout the $100 bet will not be $100 anymore." In 1908 they knew what to do. It is a damn shame we got "progressive".
I'll leave it to a talented scribe to sum it up. From Colins Ghost: "As wagering evolves in places where peer-to-peer wagering and bookmaking is permissible, the U.S. remains tied to a system that is conceptually brilliant but has become rigid and stultifying by the political forces that insist on sucking it dry."
Colin has the original DRF story linked, so for a bit of history, check it out!