Before cocktail-partygoers began to talk about mortgage-backed securities the whiskey-backed securities that were ready to threaten and threaten the U.S. financial system. Prior to Prohibition banks would accept whiskey as collateral for business loans. Whiskey’s long-lasting nature was a popular method of financing distilleries. In addition, whiskey barrels were required to be aged in government-supervised warehouses, adding a desirable degree of assurance to the collateral, which came in the form of a warehouse receipt documenting ownership of the barrels. If you need a small business loan for you whiskey business try Citrus North from a Bad Credit OK.
As the 18th Amendment to the Constitution
The ban on the production or sale or transport of liquors that are intoxicating was discussed however, there was more to the issue than morality. Banks realized that they not only would distilleries be in be in default on loan payments but their whiskey-related collateral that they had could also be worthless.
in 1918 Percy H. Johnston Vice President for the Chemical National Bank of New York stated that 500 million dollars worth of bank loans were secured by spirits. 250 million gallons actually. His eloquent address to congress predicted the fire that destroyed San Francisco by fire, something that was not too far away in the rearview mirror, and warned of the possibility of devastating consequences.
“If the amendment is put into effect and the securities that are backed by the debt will be as useless as if they were destroyed by a massive fire without any protection in the same. The value of $500,000,000 is not able to be destroyed without impacting our credit structure since the business is connected to a variety of other business lines and the resulting damage will be a huge and widespread effect.” (The Banking Monthly August 1918)
After Prohibition was passed as Prohibition was enacted, the demand for action increased. In August 1919 attorney general A. Mitchell Palmer offered banks a break, stating that although whiskey can not be sold or bought but receipts were still able to be, and can be utilized as collateral. The reason was that buying receipts would not be a transfer of any liquor since whiskey was kept in Federal warehouses (Official conclusions of Attorneys General 1922). The lenders were left in the legal position, at least legally.
To be collateral-worthy warehouse receipts require the approval of a buyer. Who would pay for a claim to an asset that was illegal? Prior to its time, Buffett’s motto to be a shrewd investor when other people are afraid was a favorite among his followers. Investors snapped up warehouse receipts for sale at low prices, putting their bets on the repeal of Prohibition.
The Whisky Trust, popularly referred to as popularly referred to as the Whisky Trust, which poured the earnings generated by the selling of yeast company and stock sale into whiskey before Prohibition and, by 1933, owned one-half out of all the whiskey produced produced in the U.S. National wasn’t alone in their shrewdness: led by Lewis Rosenstiel, Schenley Distillers purchased another 25 percent of the whiskey stocks. (Fortune magazine, 1933).
In 1933, their bet was paid for. After Prohibition abolished and the distilling industry firmly controlled by some powerful players. A small group of speculators soon became powerful and wealthy the leaders of American whiskey in the years that followed and might have provided some protection from that American banking industry during the process.