Decades before cocktail partygoers chatted about mortgage-backed securities, it was whiskey-backed securities that stood poised to threaten the U.S. financial system. Prior to Prohibition, banks accepted whiskey as collateral on business loans. Whiskey’s durability made it an attractive way to finance 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.
As the 18th Amendment to the Constitution, a ban on the manufacture, sale, or transportation of intoxicating liquors was debated, there was much...
