Whiskey Trade in Lexington

Many claims have been made regarding who was the first distiller in Kentucky.  However, from available records, the first Kentucky distiller is not known, but it is known that the first settlers converted their corn into whiskey.  William Calk, who settled in Boonsboro in 1775, is recorded as owning distilling equipment.  In 1776, Stephen Ritchie is recorded as distilling whiskey in Nelson County.  Also, among the pioneer distillers were Jacob Meyers and Jacob Forman of Lincoln County, Marsham Brashear of Jefferson County, Elijah Craig of Scott County and Jacob Spears of Bourbon County.[i]

The first known distiller in Fayette County was Daniel Stewart of Masterson Station (four miles north of Lexington).  In June 1789, he advertised “For Sale, a Copper Still of 120 Gallons Capacity, with a Good Copper and Pewter Worm.”[ii]

In 1792, Kentucky was admitted to the new union and was considered at the time to be the western frontier of the new United States.  Kentucky whiskey was commonly known as “Western Whiskey” to distinguish it from the rye-based whiskies from the east.  During this period, whiskey was used as a form of money[1] and many a farm or thoroughbred was bartered using jugs or barrels of whiskey.  In 1799, John Bradford, editor of the Kentucky Gazette, offered to receive payment for his paper in trade for sugar, whiskey or ash flooring.[iii]

According to legend, a Baptist minister named Elijah Craig acquired a number of used oak barrels to store his distilled whiskey.  Reverend Craig is rumored to have burned the insides of these barrels to avoid cleaning the remnants out.  Unknown to him, the fire had converted the linings of these barrels into charcoal.  The raw liquor he stored in these barrels turned out to have smooth, distinctive characteristics with a rich caramel brown color.  Soon thereafter, other distillers shipped their whiskey in charred oak barrels.

In reality, charring or burning the inside of oak barrels was a common practice used to clean and sterilize the barrel’s interior.  For centuries, cognac was produced in charred barrels.  Oak barrels also were common for shipping and storage of a sundry of items, ranging from dry goods (such as flour) to nails and horseshoes.  These barrels were often reused for other purposes.

In the 1790s, the Federal government imposed an excise tax of nine cents per gallon to pay the costs of the American Revolution.  During 1794, resistance in Pennsylvania to the collection of the Federal Excise Tax resulted in Federal troops being deployed by President George Washington.  Historians have named this the “Whiskey Rebellion.”  In Kentucky, a number of distillers ignored payment and by 1800, about two hundred distillers were convicted of failure to pay the tax.  The tax was eventually repealed.[iv]

By 1810, over two thousand distilleries were operating in Kentucky, with at least one hundred forty distilleries in and around Lexington.  Colonel James E. Pepper, a noted Kentucky distiller, stated during the pioneer period “a small kettle and a worm [still] placed alongside his cabin were almost as essential of the farmer’s household equipment as a fail for his grain and a plow for his land.”  He continued, “in nearly every family liquor was a daily article of consumption and the brown jug an indispensable adjunct to labor on every occasion.”[v]

Transportation limitations restricted a distiller’s market area to his immediate vicinity.  Whiskey sales were based upon the reputation of the distiller.  Quality control was limited based upon the experience of the distiller and adverse weather conditions.  Hence, the usage of Old indicated quality from longevity and experience.  The term also was applied to whiskey that was aged.

In 1821, the firm of Stout and Adams of Maysville placed an advertisement for “Bourbon whiskey by the barrel or keg.”  This is the first recorded usage of the name.[vi]  Bourbon Whiskey, sometimes called “Bourbon county whisky” during this period, was named after Bourbon County[2], Kentucky, home to many early distilleries.  Bourbon County was named after the royal family of France.  Most of the whiskey exported from Kentucky was shipped from Limestone or Shipping Port[3], then major ports on the Ohio River, to New Orleans.  It is assumed that many of these barrels were marked as being made in Bourbon County, later shortened to Bourbon.  In addition, given the French influences in New Orleans, this name selection was good marketing.

For the next several decades, the distilling industry was composed primarily of small proprietorships and partnerships.  These distilleries had limited production – usually enough for family and friends.

In 1830, Aeneas Coffey invented the column still in Ireland.  The column still was a long steel cylinder, in which the raw whiskey was heated by steam at the bottom.  The heat caused the alcohol to turn to vapor, which was then condensed along the cooler top of the still.  The column still allowed continuous distilling, which generated larger amounts of whiskey at a reduced cost.  Following the Civil War, the column still led to the consolidation of the industry into larger, commercial distilleries, usually located in major cities or along the railroads – where raw materials could be effectively shipped to the distillery.[vii]

Scientific Instruments, circa 1850s

In 1833, Oscar Pepper hired Dr. James Christopher Crow as Master Distiller of his family distillery, located on Glassy Spring Branch of Glenn’s Creek, Woodford County, Kentucky.  This distillery still operates today as the Woodford Reserve Distillery.  Dr. Crow was a physician trained in Edinbrough, Scotland.  Dr. Crow brought a scientific approach to distilling – using the hydrometer, saccharimeter (alcohol measurer) and thermometer to study fermentation.  He was the first to perfect the sour mash process – where a portion of the “sour” stillage from the prior day was mixed with the next day’s mash.  This created consistency between batches by balancing the pH.  It was noted “this Scottish chemist was able to produce a superior whisky commanding 25 cents a gallon, or considerable more than the normal price of that day.”[viii]

Henry Clay, noted Kentucky Senator, would annually ship a barrel of Crow’s whiskey to Washington “to lubricate the wheels of government.”  Other famous customers included Andrew Jackson, John C. Calhoun, Ulysses S. Grant, William Henry Harrison and Daniel Webster.  Old Crow Bourbon was named in his honor.

Whiskey Being Loaded on Steamboat

By the 1840s, Kentucky distilleries were able to expand by using the paddlewheel steamboats to ship barrels down the Ohio and Mississippi Rivers.  Kentucky whiskey established a strong following in the South, especially in Natchez and New Orleans.  Around this period, corn whiskey from Kentucky became commonly known as Bourbon Whiskey.  By the 1860s, the advances in transportation from the expanding network of railroads made it economically feasible to ship whiskey anywhere in the United States.  In addition, steamships made it possible to ship whiskey anywhere in the world.

Civil War & Industry Development:

During the Civil War, the Internal Revenue Act of 1862 authorized the Federal government to impose a temporary excise tax on distilled sprits.  This act was intended "to provide Internal Revenue to support the Government and to pay Interest on the Public Debt."  Excise and ad valorem duties were placed on products ranging from ale to zinc.

Effective July 1, 1862, the Federal government imposed an excise tax of $0.20 per “first proof” of distilled spirits.  This tax was due upon “high wines”.  By 1865 the tax was increased to $2.00 per gallon.  This temporary tax – for some unknown reason – is still being collected to this day.  Between the Civil War and Prohibition, excise taxes accounted for twenty-five to fifty percent of the Federal budget.

The act also required that distilleries be registered and pay a special license fee of $50 per year.  Kentucky was divided into eight districts, the Seventh District including Central Kentucky.[4]  Every distillery was assigned a Register Distillery (“RD”) number within each district.

The distiller was required to put up a surety bond (cash, property or acceptable personal guarantee) to cover payment of excise taxes.  Distillers were required to report production and inventory three times per month.

The Internal Revenue Bureau was established to collect taxes.  The act created the positions of storekeeper and gaugers.  Storekeepers oversaw the administrative operations, including records and tax filings, were responsible of the physical operations and controlled access to the grains, still, raw whiskey and bonded warehouses.  Gaugers were responsible for measurements of productions and collections of excise taxes.  The act allowed the distiller to construct a bonded warehouse, contiguous to the distillery, of iron, stone or brick.   Two sets of padlocks were used – one for the government and one for the distiller.  This kept both honest.  These padlocks were sealed with special seals or stamps to prevent tampering.

Due to this taxation and economic concerns, the smaller distilleries gradually ceased operating during this period.  “Prior to the imposition of a Government tax on whiskey on July 1, 1862, the business had not been separated . . . as an industry itself, but immediately after this tax was imposed it began to concentrate, and firms and corporations, possessing not only capital, but facilities for distribution, began to take the place of the farmer-distillers; this tendency becoming more marked as the tax was increased and the restrictions surrounding its business more complex and more difficult to be complied with.” [ix]

Distilling expanded into a national industry, establishing "Kentucky Bourbon” as a "gentleman's drink.”  The period was the first golden age of distilling - the Ashland, Henry Clay, Commonwealth, Silver Springs, Woodland and Lexington Distilleries were all established or reorganized as national distilleries.

Warehouse Tax Stamp, Series of 1871

These distilleries usually produced whiskies of two types – a rye (made principally with rye) and bourbon (made principally with corn).  In addition, both types of whiskey could be subdivided into sweet and sour mashes.  At this time, most distillers did not age the products beyond a year and sold their products only in barrels[5].

In 1865, the Ashland Distillery was formed in Lexington as the first licensed distillery.  The plant had the capacity of around thirty barrels per day.  During the eight-month production season[6], it could produce approximately six thousand barrels of whiskey.  Fermentation required outside temperatures to be below eighty degrees.  Without a method of refrigeration, the mash distilleries closed during the heat of the summer.

Commercial distilleries required a significant amount of capital to start up and operate.  The initial investment ranged from $35,000 to $50,000 - including the land ($5,000), distillery plant ($10,000 to $15,000), warehouses ($5,000 each) and barrel inventory ($15,000).  Barrels, for example, cost $2.50 each.

However, the profit margins of these distilleries were in excess of fifty percent and many concerns doubled or tripled their total investments in three to five years.  For example, the Ashland Distillery could generate annual revenues of around $150,000.[7] Operating expenses for the first year could be conservatively estimated at $100,000 – with raw materials of $40,000, wages of $20,000[8], replacement barrels of $15,000 and overhead of $25,000.  This resulted in a net profit of $50,000 or one hundred percent return on their initial investment.

Bonded Warehouses:

The Internal Revenue Act of 1868 lowered the excise tax to $.50 per gallon.  Distillers were authorized to store whiskey for up to one before this tax was due and the whiskey was forced out.  No withdrawals could be made without the gauger’s approval and collection of the excise tax.  The distillers could periodically rotate and inspect the barrels for leaks, with the work supervised by the gauger.  The gaugers maintained offices at the distillery.

The act also established labeling requirements for whiskey barrels.  The distiller was required to mark every barrel with its name, type of whiskey, date produced and serial number.  This was known as the government head.  This act had the effect of promoting the aging of whiskey.  As whiskey ages the harshness is slowly dissipated and the mellow flavors develop.

After the excise tax was paid, the distiller would varnish a paid tax stamp on the barrelhead.  This “tax on the barrelhead” whiskey was then stored in the free warehouse with other tax paid barrels.

Warehouse Receipt, circa 1900

Warehouse Receipts:

After the Civil War, a market developed for receipts issued for “whiskey under bond” stored in distillery warehouses.  The distillery could immediately sell its new whiskey by issuing warehouse receipts and collecting the market value of their production.  These sales would fund the operations of the distiller.  Investors could speculate on the value of bonded whiskey as the whiskey matured.  These receipts were negotiable instruments secured by specific barrels of whiskey pledged as collateral.  These receipts traded like stocks and bonds.  The value of these receipts was based upon the distiller, the age and the supply and demand for whiskey.  Whiskey receipts were considered prime investments, with banks advancing up to eighty percent of the value.  Banks at the time only advanced fifty percent of the value of real estate.

Whiskey Jugs – Sizes from a quarter, one-half, one, two, three, four and five gallons

Whiskey Brokers:

After the Civil War, a number of whiskey brokers were established in Louisville, Covington and Cincinnati that purchased bulk bourbon whiskey from Kentucky distillers and resold the whiskey around the United States.  These brokers developed the distribution system for Kentucky bourbon across the United States.

In Louisville, these brokers were located on “Whiskey Row,” adjacent to the wharves on the Ohio River.  These firms shipped whiskey on paddle wheelers down the Ohio and Mississippi Rivers to New Orleans and other points along the way.  These brokers also shipped their products by railroads to the frontier out west.  Kentucky Bourbon was available in most western saloons.

Many distillers were also partners in these brokerage firms.  In Lexington, distillers controlled the brokerage firms of Stoll, Hamilton & Company, Stoll, Vannatta & Company and J. A. Lail & Company.  In addition, the James E. Pepper Distillery operated an agency in New York City.

Many of these dealers were also rectifiers of whiskey.  Rectifiers purchased raw whiskey from the distillers and then blended the whiskey together (sometimes adding sugar and other ingredients) before selling the finished product as their brand of bourbon.  Rectifiers used three methods to produce whiskey:

  1. filter raw whiskey from different sources through charcoal and add caramelized sugars.
  2. redistill raw whiskey to remove harsh flavors and balance with some aged whiskey.
  3. mix natural or grain alcohol with flavoring and coloring agents to create whiskey.  For example, acid provides a bite and brown shoe polish provides coloring.

These mixtures were known as compound whiskey and were of questionable quality (sometimes lethal).  Without any legal “truth in labeling” requirements, these rectified whiskies were often sold as straight whiskey.

Bourbon – Supply & Demand:

         Given distilling profitability, after the Civil War, investors established a number of distilleries to enter the whiskey market.  For several years, these firms generated significant returns on investment, but quickly production (supply) exceed demand.

                        Production

                        Year                            Annual Output (Barrels)

                        1865                            80,000

                        June 1869                    220,000

                        June 1870                    160,000

                        June 1871                    105,000

                        June 1872                    135,000

By 1869, production of whiskey in Kentucky had tripled in the preceding four years to more than two hundred thousand barrels.  Demand was significantly lower, estimated at approximately one hundred twenty five thousand barrels.[9]  In 1870, the whiskey market entered a severe recession that lasted about two years.  During this period, the Henry Clay, Lexington and Grimes Distilleries closed for failing to pay excise taxes.

In July 1872, Newcomb-Buchaman & Company of Louisville issued a circular that analyzed the whiskey market.  They concluded that:

“The great depression caused by the excessive over production of the year ending 30th June 1869 has passed away, and goods of that season’s distillation are rapidly tending to a proper level of prices.  Notwithstanding the production of the seasons of 1870 and 1871; following so enormous a production as that of 1869, stocks of 1870 and 1871 goods are now very much broken and command relative high prices, and as that the portion of 1870 and 1871 goods carried over the summer will constitute our supplies of two and three year old goods next season, they must from their scarcity necessary rule dear.

The production of the season now about drawing to a close is considered within the legitimate wants of the trade.”[x]

During the 1870s and 1880s, bourbon production in Kentucky again tripled and doubled, respectively.

Carlisle Revenue Act of 1879:

The Carlisle Revenue Act of 1879[10] extended the bond period from one to three years (later extended to eight years in 1894 and then twenty years in 1958).  This extension allowed distillers with overproduction to prevent their inventory being forced out of bond.

The act also authorized the distiller to pay excise tax only on the remaining whiskey in a barrel after losses to leakage and evaporation.  These losses were known as outage.  The gauger measured the whiskey at withdrawal and collected taxes on the actual amount of whiskey remaining, instead of government estimates.

Whiskey Depression:

In 1882, bonded warehouses contained over one and a half million barrels, with an estimated consumption of two hundred thousand barrels per annum.  This caused a short-lived recession in 1882 caused by over production.  The large brokerage Newcomb-Buchaman Company of Louisville failed during this recession.  In addition, the D. A. Aiken & Company, operator of the Lexington Distillery, closed.

Bonded whiskey traded in the range of $.35 to $.75 per gallon for new whiskey and $1.50 to $2.00 for aged whiskey.  In 1890, the warehouse receipts for local whiskey traded for:

                                    Spring ’90       Spring ’89       Spring ’88       Spring ’87       Spring ’86

Ashland                       $0.35                  $0.525                                  $1.90

Commonwealth           $0.40                  $0.55            $0.70               $1.95

Jas. E. Pepper                                       $0.65            $0.75                                       $2.50

Old Pepper                  $0.70                 $0.825                                   $2.65              $2.90

Old Tarr                      $0.45                  $0.675                                                          $2.25

Woodland                   $0.475                $0.60                                                            $1.00

Ashland Rye               $0.475                $0.675                       

By the 1890s, the accumulated production of Kentucky distilleries was more than one and a half million barrels of whiskey.  Production again exceeded demand.  Distillers found that they were unable to sell their whiskies at a price to cover their costs, storage and taxes.  Overproduction devastated the entire industry in Kentucky.  The price of bonded whiskey traded as low as $.15 to $.25 per gallon.  Banks liquidated some lots held as collateral for $.05 to $.10 per gallon, while some lots failed to find buyers at any prices.

Distilleries all over Kentucky closed or faced ruin.

Compounding the oversupply problems, in 1893, a banking panic started on Wall Street with the collapse of Western mining stocks.  A number of banks failed and the supply of money dried up.  It was not until 1897 that the economy began recovering.[xi]

All the distilleries in Lexington but one failed in some manner during this period.  The Commonwealth Distillery survived, but its owners – the Stoll family - were prominent bankers who had the wherewithal to keep it afloat.  The Henry Clay Distillery entered receivership, but the wealth of the owner James E. Pepper and his wife allowed it to continue.  The Ashland Distillery was liquidated and eventually sold to the Stoll interests.  The Woodland Distillery was also liquidated after issuing fraudulent warehouse receipts.  The Silver Springs Distillery was sold to James E. Pepper.  None of the smaller concerns survived this period.

Whiskey Trust:

During the late 1880s, several attempts were made to “rationalize” the distilling industry by creating a trust or monopoly.  In 1888, the Distillers’ and Cattle Feeders’ Trust was created in Peoria, Illinois, to consolidate the distilleries in the region.  This attempt quickly failed due to the inability to control production of non-members.  Around 1896 Julius Kessler organized the Kentucky Distilleries and Warehouse Company as a holding company for the Kentucky distilleries.  In 1899, the Distilling Company of America[11] consolidated the Kentucky Distilleries and Warehouse Company with the American Spirits Manufacturing Company and the Standard Distilling and Distributing Company.  Across Kentucky, these firms controlled a number of subsidiary and affiliated distillers and whiskey brokers.

In January 1898, the Whiskey Trust[12] invited the distillers in Lexington - Jas. E. Pepper & Company and Stoll, Vannatta & Company - to join the combined trust.  These two companies controlled all the operating distilleries in Lexington at the time.  This offer involved the trade of stock in the trust for the distiller.  Charles H. Stoll, a Lexington attorney and member of the prominent distilling family, directed this campaign and was the prime mover in Kentucky for the trust.  His brother, James S. Stoll, was an advisory director of the trust.

Eventually the Stolls operated in concert with the trust, but the Pepper distillery stayed independent.  In 1908, the Stoll distilleries were finally consolidated with other trust distilleries located outside of Fayette County.

It was quoted that the “object of the pool is to take care of the whiskey that, either thorough failures or collateral, passed into the hands of banks.  The banks have placed these small lots on the market at low prices.  The pool intends to purchase these small lots to protect the market price.”[xii]

By the early 1900s, the Kentucky Distilleries and Warehouse Company controlled over ninety (90%) percent of the whiskey production in Kentucky, with the capacity of sixteen million barrels annually.  The trust was capitalized at thirty two million dollars and had one million barrels in bonded storage.  The trust shut down the smaller facilities and concentrated production at the larger, more efficient distilleries.  The trust was never a monopoly, but by sheer size forced the outside whiskey houses to act in accord with its wishes.

Bottled in Bond Act:

Distillers up until the late 1880s sold their products primarily in bulk barrels.  Wholesalers and brokers then resold the whiskey, sometimes in traditional brown jugs for home use, but usually in barrels, half barrels or kegs to retailers.  A significant portion of whiskey was sold in bars, saloons and taverns.  Distillers supplied back bar decanters - quart decanters with the distiller’s name in gold leaf - to bars and saloons.  These decanters were filled from the barrels by the barkeep.  Some dishonest barkeeps would substitute cheaper whiskey or even dilute whiskey with tea.

Prior to the 1880s, bottles were expensive and generally not used at the distillery level.  In 1870, Old Forrester Whiskey was the first bourbon sold exclusively in bottles to guard the quality of the brand.  This whiskey was marketed to the doctors and druggists for medicinal purposes.  It sold at a premium price to cover the cost of bottles.[13]  In 1886, the Jas. E. Pepper & Company also began to bottle its Old Pepper whiskey.  The Pepper bottles contained embossing giving the distiller’s name and location.

The Bottled in Bond Act of 1897 allowed distillers to bottle whiskey and then store the bottles in bond at the warehouse.  Payment of excise taxes was postponed until the bottles were removed for sale.  To be bottled in bond, the whiskey must be bottled at 100 proof, at least four years of age and bottled at the distillery where it was produced.  Bottles were cased in multiples of six bottles, each case containing more than two, but less than five gallons. 

The act legally established standards for “bonded straight whiskey.”  When labeled as “Bottled in Bond” (and later sealed with a tax stamp) the consumer was assured of the quality of the whiskey.  This act established the first federal regulations for whiskey labels.  Criminal penalties were imposed on violators.

Tax Stamps (Half Pint), circa 1940

Whiskey Boom:

By the late 1890s, the price of bonded whiskey began to recover as the industry – thinned by the depression and controlled by the Whiskey Trust – allowed whiskey inventory to be depleted.  In 1899, there were only six hundred thousand barrels of whiskey in storage, compared to almost two million barrels ten years earlier.

                        Production

                        Year                            Annual Output (Barrels)

                        1894                                       375,000

                        1895                                       430,000

                        1896                                       260,000

                        1897                                       125,000

                        1898                                       290,000

                        1899                                       375,000

                        1900                                       410,000

                        1901                                       575,000

                        1902                                       485,000

By the spring of 1899, a speculative boom began in whiskey receipts.  In March the newspaper reported, “the recent combination of whiskey manufacturers, especially that of the Kentucky manufacturers, has given such confidence in future prices of whiskey as to keep up the boom in the sale of whiskey in bond.”[xiii]  The next week they reported, “the sales for this week were over 200,000 barrels and the market is stripped of all newer goods from the crops of 1896 to all of 1898’s.”[xiv]  “Whiskies that were a drag on the market at twenty-five cents have within three weeks run up to thirty-five cents, and in some cases, as high as forty cents” and “we are convinced that the conditions will inevitability force prices considerably higher in the near future.”[xv]

Over the next twenty years, the price of new whiskey remained strong and ranged from $.50 per gallon to $1.75 per gallon.  In 1908, the entire inventory of the Ashland Distillery was sold in bulk at $1.75 per gallon.

Pure Food and Drug Law:

In 1895, the distilling industry established the National Wholesale Liquor Dealers Association to establish standards for the spirits industry.  Due to the questionable quality of many whiskies (especially compound whiskey from rectifiers), the association members agreed to strict distilling regulations and rules for “truth in labeling.”

Colonel Pepper and other Kentucky distillers of high-grade whiskies were strongly in favor of stricter requirements and labeling provisions.  Those opposed (mainly rectifiers) identified Colonel Pepper and others as “bourbon aristocrats, identified with horse farms, breeders of fancy cattle and sartorial elegance.”  This assessment was correct in many ways.[xvi]

Joseph Wolf, President of the James E. Pepper Distributing Company (distributors of Old Pepper Whiskey) was an early member and strong supporter of these regulations.

Ten years later, the Pure Food and Drug Law of 1906 was passed as the first consumer protection legislation in the United States.  This law was the result of a number of food and drug products that contained harmful or lethal ingredients being sold to the unsuspecting consumer.  The whiskey industry was targeted because rectifiers were passing their products (compounded whiskies often made with neutral spirits) off as the real product.  The law took effect on January 1, 1907.

The Federal government began enforcing regulations aimed at “adulterated” or “misbranded” whiskey.  Federal regulations created three classes of whiskies; these were 1) straight whiskey, 2) blended whiskey (made of two or more straight whiskies) and 3) imitation whiskey (rectified or compound whiskey).

From 1906 to 1909, following the passage of the Pure Food and Drug Act, rectifiers and distillers battled over the definition of whiskey.  This period was known as the Whiskey War.  In 1909, these regulations were revised to two whiskey classes – straight and blended.  Both classes were called whiskey since they were distilled from grain mash.  Rectified whiskey made from grain neutral spirits was defined as “compound whiskey.”  Regional names, such as Kentucky Bourbon, were allowed.  Labels after this period required that the distiller names and type of whiskey be included.   This decision was known as the Taft Decision, after President William H. Taft.

Prohibition:

The roots of Prohibition can be traced to the 1890s, with the founding by a group of businessmen of the Anti-Saloon League.  After the United States entered the First World War, the temperance movement made major strides toward a national prohibition.  The Lever Food and Fuel Control Act of 1917 was passed as a temporary wartime measure to conserve grains and foodstuffs for the troops in Europe.  The act authorized President Woodrow Wilson to restrict the use of grains and barley malt in distilling.[xvii]  The next year, the Food Conservative Act of 1918 provided "that no grain, cereal, fruit or other food products may be used in the production of fermented liquors after May 1, 1919."[xviii]

During the months leading to the deadline, the Pepper Distillery increased its output with the limited materials available before production was stopped.[xix] The last batch distilled by the Pepper concern was on November 11, 1918 and Lexington distilling went dry.  Ironically, this date is also the official end of the First World War.

The Eighteenth Amendment was approved in 1917 by Congress to prohibit the “manufacture, sale or transportation of intoxicating liquors within, the importation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes.”  On January 16, 1919, the amendment was ratified with the approval by three-fourths of the states.  Kentucky was the third state to approve the amendment.  The amendment was to take effect one year later.

The National Prohibition Act was approved in October 1918 to enforce the amendment.  The act was also known as the Volstead Act after its sponsor, Andrew Volstead of Minnesota.  President Wilson vetoed this legislation, but Congress quickly overrode his veto.  After January 16, 1920, it was against the law to manufacture or sell any beverage containing more than one-half of one percent alcohol.  The first offense was punishable with a fine of up to $1,000 and a prison term of up to six months.

In Lexington, ninety-six saloons, eighteen distributors, one brewery and one distillery officially closed their doors.  Lexington lost more than $85,000 in tax revenues, and more than a thousand workers were out of work.[xx]  The First World War was over before this amendment became effective, but it became law anyway.  The "GREAT EXPERIMENT" had begun.

During the two months before Prohibition, distillers rushed to ship whiskey supplies out of the country.  Bourbon was shipped to Germany, Cuba and the Bahamas.  However, on January 17, 1920 the Pepper warehouse still held twenty-six hundred barrels and the Ashland  warehouse fifty barrels.  These barrels held thirty-five to forty-five gallons each.[xxi]

Section 37 of the Volstead Act authorized the sale of medicinal whiskey.  Medical doctors could prescribe whiskey and prescriptions would be filled at drug stores.  Prescriptions were limited to one quart at a time, later one pint every ten days.  Doctors were limited to one hundred prescriptions annually, but many exceeded these limitations.[xxii]

Prescription Form, circa 1920s

Liquor Concentration Act of 1922:

With the lack of security, especially at rural distilleries, whiskey became the target of gangsters.  Several warehouses were allegedly burned after the whiskey was replaced with water.  The Liquor Concentration Act of 1922 required that all whiskey stored in bonded warehouses be concentrated into newly designated warehouses to safeguard the remaining inventory.  These warehouses were located in Lexington, Bardstown, Frankfort and Louisville.  In Lexington, the Pepper warehouse on Old Frankfort Pike was licensed as a concentration warehouse.  Its whiskey stocks, along with those from a number of smaller distilleries, were bottled over the next twelve years for medicinal sales.

Twenty First Amendment:

In February 1933, Congress approved the Twenty First Amendment to repeal the Eighteenth Amendment.  The amendment was quickly ratified by December 1933 and became effective immediately.  Prohibition officially ended in 1934, and only 34 of the 157 distilleries in Kentucky operating in 1919 reopened.

In Lexington, James E. Pepper & Company reopened, but ownership passed to the Schenley interests.  This distillery operated until 1961, and the bonded warehouses were used until 1976.

Case Tax Stamp, Series of 1933

In 1934, Kentucky distilleries began blending bourbon to extend the short inventory of aged bourbon remaining from Prohibition.  In 1935, the Federal government formalized the definition of bourbon and mandated that only new, charred oak barrels be used in bourbon production.  Only by the end of the 1930s were stocks of aged inventory built up to a level to satisfy demand.

War Production:

During the Second World War, the Federal government converted whiskey distilling to industrial alcohol production for the war effort.  Industrial alcohol (grain neutral spirits of greater than 190 proof) was a critical ingredient in war production.  For example, every naval shell or jeep used three and twenty-three gallons, respectively, of industrial alcohol during production.[xxiii]  At this point, the industry was consolidated primarily into the “Big Four” – Schenley, National, Hiram Walker and Seagram Distilleries.  In Lexington, the Pepper Distillery shifted production to industrial alcohol.  In 1945, the industry returned to bourbon distilling.

At the start of the Korean War, the industry increased production anticipating wartime restrictions.  However, these restrictions never occurred and over production led to excessive inventory.  The Federal government extended the bonding period to twenty years to allow the excessive inventory to deplete.

In 1964 Bourbon Whiskey was designated a distinctive distilled spirit by Congress.  In 1990, the USS Kentucky, a Trident nuclear submarine, was christened by a bottle of Kentucky Bourbon.

 

[1] Prior to the Civil War, coins and state banknotes (often drawn on questionable institutions) were the only money supply.  During the Civil War, the Federal government began issuing “greenbacks” which became modern currency.

[2] Bourbon County was one of the three original counties of Kentucky.  Eventually thirty-four counties were designated from the original Bourbon County.

[3] Limestone is now known as Maysville, Mason County, Kentucky and Shipping Port is now part of Louisville, Jefferson County, Kentucky.

[4] Central Kentucky, including Bourbon (Paris), Clark (Winchester), Fayette (Lexington), Franklin (Frankfort), Montgomery (Mt. Sterling) and Woodford (Versailles) Counties.

[5] Whiskey in barrels or kegs was known as in wood, in bottles as case goods and in jugs as jug goods.

[6]  Whiskey production was divided into a fall and spring season, with the year ending in June.

[7] New whiskey was valued at $25 per barrel or $.47 cents per gallon.  Costs were estimated at $10 per barrel or $.20 cents per gallon, including the overhead burden.

[8] A distiller was paid $1,500 to $3,000 per year.  Skilled distiller workers were paid $1.00 to $1.50 per twelve-hour workday.

[9]  Estimated based upon production for season ending June 1871 of roughly 105,000 barrels and reduction in bonded storage of roughly 20,000 barrels from December 1870 to December 1871.

[10] John G. Carlisle was a prominent Kentucky Senator and Secretary of the Treasury for President Grover Cleveland.  He was a close friend of Colonel Edmund H. Taylor, Jr.

[11] In 1902, the Distillers’ Securities Corporation was formed as a successor to the Distilling Company of America.  In 1920, the name was changed to the U. S. Food Products Company.  The company failed in 1921 and was reorganized in 1924 as National Distillers Products Company.

[12] The Whiskey Trust was not a single corporate entity, but a loose federation of distillers and corporations, many with interlocking owners and directorships.

[13] Old Forrester today is one of the flagship products of the Brown Forman Corporation.

 

[i]  Kleber, John E., The Kentucky Encyclopedia, University Press of Kentucky, Lexington, 1992, page 103 and page 266.

[ii]  Jillson, Willard Rouse, Early Kentucky Distillers, Standard Printing, Louisville, 1940 and Kentucky Gazette, Lexington, Kentucky, June 27, 1789.

[iii]  Kentucky Gazette, May 16, 1799, page 2.

[iv]  Cowdery, Charles K., Bourbon Straight, Self Published, Chicago, 2004, page 5; Getz, Oscar, Whiskey:  An American Pictorial History, David McKay Company, New York, 1978; Downard, William L., Dictionary of the History of the American Brewing and Distilling Industries, Greenwood Press, Westport/London, 1980.

[v] Taylor, Richard, The Great Crossing:  A Historic Journey to Buffalo Trace Distillery, Buffalo Trace Distillery, Frankfort, 2002, page 51 and 46.

[vi]  Kleber, page 104.

[vii] “19th Century Distilling Papers at The Filson,” Michael R. Veach, The Filson, The Filson Historical Society, Louisville, Kentucky, Volume 6, Number 3, Fall 2006, pages 6 – 9.

[viii]  Lexington  Leader, February 8, 1950, section 2, page 24, column 1 – 8.

[ix]  Preyer, Edgar R., WHISKEY  Information and Guide for Liquor Business, New York, 1901, page 122-23.

[x] Cecil, page 10 and “Circular,” Newcomb, Buchanan & Company, Louisville Kentucky, July 1, 1872, Lexington Press, July 6, 1872, page 4, column 6.

[xi] Ambrose, William M., First Security Corporation of Kentucky  1835 – 1992, Lexington, 1992, page 18.

[xii] Lexington Herald, January 27, 1898, page 1, column 5.

[xiii] Lexington Herald, February 5, 1899, page 1, column 3.

[xiv] Lexington Herald, February 12, 1899, page 1, column 5.

[xv] Lexington Herald, March 15, 1899, page 8, column 3.

[xvi] Taylor, page 92.

[xvii] Ambrose, William M., A Pint of History – Lexington Brewing Company, Lexington, Kentucky, Lexington 2002, pages 60 – 2.

[xviii].  Lexington Herald, April 25, 1919, page 1, column 5.

[xix].  Lexington Herald, April 25, 1919, page 1, column 5.

[xx].  Lexington Herald, May 25, 1919, page 1, column 5.

[xxi]  Lexington Herald, Lexington, Kentucky, January 16, 1920, page 1, column 5.

[xxii] Cecil, Sam K., The Evolution of the Bourbon Whiskey Industry In Kentucky, Turner Publishing Company, Paducah, 2000,  pages 23 – 5.

[xxiii] Campbell, Sally Van Winkle, But Always Fine Bourbon, Old Van Winkle Distillery, Frankfort, page 85 – 87.

 

References: 
William M. Ambrose, Bottled In Bond under U. S. Government Supervision, Limestone Press, Lexington, 2008.
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