Distilled spirits were as common as hogs and corn in early Kentucky. The state’s abundance of fertile land and limestone springs offered settlers, including those specifically intending to set up distilleries, the ingredients necessary to create a variety of spirits. Distilling was an early cottage industry. Many farmers distilled whiskey in their own stills using their surplus grain. Kentuckians used corn, rye, and other commonly grown grains to make whiskey, a favorite spirit due to poor water quality in many regions.

During the early 1800s, Kentuckians advertised their product as "Old Bourbon" or "Bourbon" whiskey, allegedly derived from Bourbon County, which, until 1789, encompassed most of north–central and northeastern Kentucky, including important shipping port, Maysville. Ships left Maysville, followed the Ohio River to the Mississippi River and docked in New Orleans, an early bourbon market. Long after revised boundaries placed Maysville in Mason County in 1788, whiskey makers identified their product with the "Old Bourbon region." By the 1840s, distillers dropped "old" and the drink became nationally known as "bourbon whiskey."

Homemade bourbon was commonplace until 1862, when President Lincoln levied the first federal excise tax on whiskey production in almost 50 years, to help fund the Civil War. Past taxes generally went unpaid and ended through rebellion or legislation, but this one remained after the war. Many Kentucky distillers refused to pay, hid their stills in the woods, and worked at night. Government revenue agents hunted "moonshiners," attempted to seize their equipment, cease business, and prosecute them. Though occasionally successful, revenuers often faced silence and resistance from community members. Moonshining and affiliated traditions contributed to persistent Kentuckian stereotypes of "drunken, violent hillbillies." Illegal whiskey production and its popularity continued despite the image.

Early bourbon varied in quality, involving dilution with water, dyes, or other whiskeys. Consumers and distillers, including George Garvin Brown, founder of modern–day Brown–Forman, wanted to rectify production inconsistencies, a common issue. Brown was first to guarantee quality by selling whiskey in sealed bottle. The government regulated production with specified distillation, aging, and bottling requirements for bonded whiskey in the 1897 Bottled–In–Bond Act. Nine years later, the Pure Food and Drug Act, which required drug manufacturers to indicate alcohol content in products (partially in reaction to popular, but not necessarily safe patent medicines), incited a three–year war over the legal definition of whiskey. President William Taft resolved the issue in 1909 by designating three distinct types — straight (the most "pure" bourbon), blended (mixed neutral spirits and straight whisky), and imitation — and requiring that labels note specific production processes and ingredients.

Though important to Kentucky’s economy, whiskey was not universally accepted. Native Kentuckian, Carry Nation, became active in the Temperance Movement and violently opposed alcohol and saloons after two failed marriages — an alcoholic, and a minister. She traveled the country (though mainly active in the Midwest) destroying saloons with her trademark hatchet; she coined her protests, "hatchetations." Nation was also active with a national religious–based Prohibition organization, the Women’s Christian Temperance Union, which had Kentucky chapters.

After Kentucky ratified the 18th amendment in 1918, which prohibited manufacturing and selling alcohol, its economy suffered. Distilleries closed, decimating towns and cities, including Louisville, which alone lost 8000 jobs. Prohibition economically hurt everyone involved, from manufacturing and shipping industries, to bottle and label suppliers, and farmers growing the grain.

Kentuckians fought back. Paducah native and nationally–known newspaperman Irvin S. Cobb was active in the national Association Against the Prohibition Amendment (AAPA), one of many organizations that contributed to the amendment repealing Prohibition. Cobb wrote AAPA press releases arguing Prohibition increased related instances of alcohol and crime.

Cobb’s arguments were based on fact as moonshining and bootlegging boomed as illegal, yet popular businesses. These traditions continued after Prohibition was repealed because Kentucky distinguishes between "wet" and "dry" counties; pre–Prohibition legislation allowing counties to determine whether to permit alcohol sales. Currently, about 40% of Kentucky’s counties are "dry;" nearly one–third are "moist," restricting alcohol to specific beverages, venues, and even some cities; the remaining "wet" counties allow the sale of alcohol. Advocates of limited alcohol sales argue that this can reduce alcohol addiction and other alcohol–related problems.

Bourbon remains a popular and distinctly American product, acknowledged as such by the government since 1964, when they legally reaffirmed its definition as containing mostly corn, distilled to 160 proof or less, and aged at least four years in a charred oak barrel. Today, Kentucky distills almost all the bourbon consumed in the country, enduring as a quintessentially Kentuckian tradition.