The rum trade was influential in the new colony. In 1810, when government funds were insufficient to build a new hospital, Governor Macquarie persuaded a consortium of businessmen to undertake the task. In return, they were granted a monopoly on rum imports. What became known as the Rum Hospital, in Macquarie Street, accepted its first convict patients in 1816.

In the early days of the penal settlement in New South Wales, many of the new arrivals were suffering from scurvy, dysentery, smallpox and typhoid.  There were still no effective remedies against communicable diseases such as tuberculosis, measles, chickenpox, cholera, whooping cough and influenza. Vaccination against smallpox was available, but supplies were extremely limited.

The first Sydney hospital was located on George Street (then called High Street) in The Rocks area. Initially just tents, there were soon more substantial structures. The first leaky wooden building was 84 feet by 23 and was divided into a dispensary, a ward for the troops, and another for the convicts. A brick dispensary was later built and the Second Fleet brought a prefabricated portable hospital. However, despite the addition of various outbuildings over time, the hospital was inadequate to cater to the needs of the colony.

When Governor Macquarie arrived in 1810 he set about improving conditions in the town, including that of public buildings. All medical care at the time was provided by the government through the Colonial Medical Service, but the British government refused to provide the money to build a new hospital. Macquarie turned to a group of businessmen for funds. The contract he negotiated allowed them to import 45,000 gallons of rum, later increased to 60,000 gallons. Convict labour was also provided for the building works.

Officially called the Sydney Infirmary and Dispensary, the new hospital became known as the Rum Hospital. Parts of the building remain and now house the New South Wales Parliament.