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The Whiskey Breath of Wall Street: What the Invention of Bourbon Has to Do With Credit Derivatives


If you make a fortune trading derivatives, it's entirely appropriate to have a good single malt or small batch bourbon to celebrate. Here's why.

MINYANVILLE ORIGINAL When I wrote The Poker Face of Wall Street, I got some good reviews, but also some complaints about mixing poker and finance. Most of the unhappy people were poker players, but one Wall Street trader rhetorically (I think) asked if my next book was going to be S**t Faced on Wall Street. I didn't use that title, but there is an important connection between whiskey and the development of modern finance.

It begins with a coincidence. During the Revolutionary War, the colonies that were formerly known as British had warm feelings about France because that country supported their efforts with money and troops. Virginia expressed this gratitude by naming some of its far west claims after General Marquis de Lafayette (Fayette county), King Louis XVI (the city of Louisville), his palace (the city of Versailles), and his dynasty (Bourbon County). That last one is important.

After the war, as the population in the area increased, and especially after 1792 when Kentucky became a state in its own right, Bourbon County was broken up into smaller counties, one of which was named Bourbon. That led to people referring to northeastern Kentucky as "Old Bourbon," to distinguish the original large region from the newly-named smaller county.

Oak barrels were one of the export items from Old Bourbon. These were branded with the region of manufacture, and shipped down the Ohio River. They were shipped already filled because there's little extra cost to adding weight in river transportation. The French speakers in St. Louis, of course, had their hearts warmed by seeing old Louis' name on the barrel (he had been decapitated in the French Revolution by this time), but it was the "Old" that electrified them.

You'll understand why if you've been to the French Caribbean island of Guadeloupe. The food is wonderful, and many of the best restaurants are in single-family houses with small kitchens. They prepare meals for one table at a time, so if you arrive and three tables have not yet had their food, you have a two or three hour wait before dinner. That would pose a problem in Manhattan, but in Guadeloupe, the restaurants put a free bottle of rhum on the table, with a dish of limes and raw sugar; the longer you wait, the more can drink. Add a view of a topless beach, or if it's too dark for that, Caribbean stars and phosphorescent fish, and who cares how long the food takes?

That's "rhum" to a French-speaking North American, but there's also "rhum vieux," an extraordinarily smooth and complex drink more like brandy than the stuff you make rum-and-cokes from and that civilized restaurants give away for free. Rhum vieux is a very long way from free. "Vieux," of course, is French for "old," so when the monsieurs from St. Louis saw "Bourbon vieux," they rushed for their verre ballons (snifters, that is).

One taste, and they had to smash the crystal because it was ruined for anything drinkable. The stuff in the kegs was raw corn likker, but the St. Louis merchants decided it was some chemical used to cure the barrel. They shipped it right down the Mississippi to New Orleans.

The New Orleans merchants were also French and had the same initial reaction. But they did figure out that the stuff inside was alcohol. The quality was so low that it would only be served in the worst waterfront bars. Afterwards, the barrels were knocked apart to be shipped to Scotland, where whiskey makers had been deprived by war of their usual supplies from Jerez in Spain. New Orleans was supposedly on the same side of the war as Spain, but in the Caribbean it was (and is) easy for goods to change nationality discretely.

I don't know how a filled barrel made it to Scotland. The important thing is that it was bought by a 20-year-old medical student named James Crow, probably to preserve medical specimens. We do know that he sipped it and wondered why someone would sell a barrel of pretty good whiskey for the price of the container. He did some research and discovered the stuff was mistaken for turpentine in St. Louis, considered barely drinkable in New Orleans, and regarded as decent whiskey in Scotland. Having a scientific turn of mind, he figured out the secret was quercus alba, the oak used for the barrel. It is native to North America, and it is one of only three species suitable for aging spirits (the other two are found in Europe, quercus robur and quercus petraea, and are inferior).

Crow dropped out of medical school to travel to Kentucky and start shipping these magic barrels to Scotland. If they could turn turpentine into pretty good whiskey, imagine what they would do with good stuff!

When Crow arrived, he found the cheapest barrels were the ones that had been sent down to New Orleans filled with liquor for sailors, and returned filled with salted fish. To get the fish taste out, he had to char the inside of the barrel. He also discovered what the natives already knew: The low-iron limestone water and sweet maize were ideal for making spirits. Crow's Scotch whiskeOld Crow Bourbony experience and scientific training led him to make many improvements to the manufacture of the whiskey. The result was so good that the wealthy Southern plantation owners started drinking the stuff before it could get to New Orleans, and it became the regional drink of choice. Bourbon today is still made in charred oak barrels, which are then shipped to Scotland and used for Scotch. And you'll still see "Old Crow" bourbon, distilled by Beam (BEAM), and originally manufactured by our hero, in your liquor store. It's the oldest brand of bourbon still being made.

The story does not end there. Crow had established a connection between venture capital in Scotland and the unlimited natural resources of interior North America. Moreover he set up a regular, circular trade network. Information flows along with goods. The Scots were branching out all over the world as the British Empire expanded, working as merchants, army officers, doctors, and missionaries (leading to the more-true-than-funny quip that the Empire was won by the Irish in the name of the English for the benefit of the Scots).

Far from the attentions of governments and rich people, this worldwide network was connected with adventurers from all over the world opening up the mines, forests, farmlands, ranches, and other riches of North America. It evolved into a dynamic economy organized by futures exchanges like the Chicago Board of Trade, which gave the world derivatives, which took over the financial world in the 1970s and rule it today.

Of course, Scotland was not the only country that played a part in this drama; whiskey is not the only link between Scotland and Kentucky and Crow was not the only whiskey innovator and diplomat. But if you make a fortune trading derivatives, it's entirely appropriate to have a good single malt or small batch bourbon to celebrate. And if your job and dreams are wiped out by derivatives traders, have one to ease the pain. For better or worse, there's whiskey breath on Wall Street.
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