2 Answers

We had one as a kid and I was always told it was an alcohol compass.  I never questioned it any more, so do not know if it really was or not.  I thought I read something once with reference to an alcohol compass, so thought they were indeed filled with some sort of alcohol.  Makes some sense, as water filled would freeze in the winter, no??

Better compasses are "liquid-filled"; the chamber containing the needle or disk is filled with a liquid whose purpose is to damp the oscillations of the needle so it will settle down to point to North quicker, and also to protect the needle or disk from shock.  It does not continue to state what type of liquid is used.  However, in early Chinese compasses the liquid is said to be water.

from wikipedia