Like much of frontier land, this area was Cherokee hunting ground and soon pioneers receiving land grants came to Cosby to build their homes and forts, and farm their new land. The origin of the name "Cosby" is a mystery, with two theories. The first centers around an early trapper and distiller named Jonathan Cosby (sometimes spelled "Cozby"). The second suggests it was named after Dr. James Cozby, a Revolutionary War veteran and friend of John Sevier, who claimed some of the land. In any case, the name appears as early as 1838. While the area depended on farming and logging, the Great Depression and the establishment of Great Smoky Mountains National Park greatly affected the logging business and many residents turned to making corn whiskey from their crops for income. As liquor supplies were strained with the rise of prohibition in early 1900s, demand for "moonshine" grew steadily. During World War II, the Manhattan Project at Oak Ridge brought in people from all over the country. With many unaccustomed to Tennessee's dry laws, they turned to illegally distilled liquor, making the moonshine demand in Cosby even higher. Because of this, for the first half of the 20th century, Cosby was known as "The Moonshine Capital of the World."

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