Lombard Loan

Lombard banking refers to the historical use of the term 'Lombard' for a pawn shop in the Middle Ages, a type of banking that originated with the prosperous northern Italian region of Lombardy (hence the name).

The term was sometimes used in a derogatory sense as townspeople often accused lombards of usury. The lombards were never very popular for this reason and often had trouble with local governments. They were careful to write down all of the terms of contracts, to protect themselves, but that was no guarantee for success in times when few others could read and write, including local leaders.

History

Main articles: History of pawnbroking and Pawnbroker

A Christian prohibition on profit from money 'without working' made banking sinful. Though Pope Leo the Great forbade charging interest on loans by canon law, it was not forbidden to take collateral on loans. Pawn shops operate on the basis of a contract that fixes in advance the 'fine' for not respecting the nominal term of the 'interest free' loan, or alternatively, may structure a sale-repurchase by the 'borrower' where the interest is implicit in the repurchase price. Similar conventions exist in modern Islamic banking. As no economy or money-based society can prosper without any credit, various ways around the prohibition were devised, so that the lowly pawnshop contractors could bundle their risk and investment for larger undertakings. Christianity and Judaism generally ban usury, but allow usury towards heretics. Thus Christians could lend to Jews and vice versa. The only real drawback for a young man who desired a future in the financial world of the Middle Ages was that he needed to be able to read and write. The methods used for bookkeeping were carefully kept within families and slowly spread along trade routes. This knowledge was readily available to Jesuits and Jews, who consequently played a major role in European finance. Generally the Jesuits took the role of go-between with heads of state, while the Jews manned the low-end pawnshops. This explains the disproportionately large share of Jews in the goldsmith trade and early diamond market (diamonds being a lightweight alternative to gold).

It comes as no surprise that the pawn shops of Rome were the most prosperous of all, especially in the 15th century under Popes Pius IV and Sixtus V. This Italian 'Lombard' pawn shop method became famous and had a name for reliability and honesty. The use of the term 'Lombard' for reliable pawn shop grew slowly from city to city, and became prevalent in Cahors, southern France, from where the Cahorsins moved as far North as Amsterdam in the 13th century, where they were called Cahorsijnen , Cawarsini or Coarsini .

15th and 16th centuries

In 1492 Ferdinand and Isabella of Spain signed a decree expelling all Jews who refused to be converted to Christianity. A considerable number moved into Portugal. Many members of the migrant Jewish community in Portugal proceeded to become wealthy in commercially successful Portuguese port cities. Being forced on the move, Jewish families remained mobile and quickly developed international family agencies for growing brokerage houses involved with shipping. Such family networks of mobile Jewish "lombards" migrated from port city to city with the Spanish Inquisition and created international networks. In France the Lombards became synonymous with the Cahorsins. Most European cities still have a street named Lombard Street after the pawn shop that once housed there. In Dutch, the name for a pawn shop is still lommerd , and the same etymology persists in the names of various banks (unless named after some family). In Polish and Russian, a pawn shop is called simply lombard .

17th and 18th centuries

The near-monopoly position of the Jewish lombards in finance became less prominent as various Protestant factions after the Reformation became just as persecuted as the Jews. In the 18th century many bankers and shipping agents were Quakers. Though the pawnshops were no longer manned by Jews and/or Jesuits, they were more and more often called Lombard houses, and most major port cities still have a 'Lombard Street' or 'Lombard Ally' today. American examples are San Francisco, New Orleans, Boston, Baltimore, and Philadelphia. The term 'Lombard' for pawnshop (or pawnshop owner) was in use well into the late 1700s, thus many of these streets were named with the establishment of shipping agents in those towns.

The religious restrictions made banking seem immoral and Lombard bankers were often considered to be undesirable company. These prejudices were the reason that banking families intermarried and kept to themselves, resulting in international dynasties of banking families. The story of Mary Poppins illustrates how banking was still considered immoral by some in the 20th century, though in the business world it was by that time a perfectly respectable profession.

Modern day

The practice of Lombard credit is still commonly used in central banking, where central banks lend against marketable securities, such as government bonds. Modern repo (repurchase-sale transactions) are also forms of Lombard lending: one bank sells marketable securities to another (at a discount), with an agreement to repurchase the securities (typically at par) in a fixed period of time. Although the legal documentation of the transaction is that of a sale and subsequent repurchase, the substance of the transaction is a secured loan (and under most accounting standards, will be treated as a loan). Pawn shops in many countries and languages are often still referred to as Lombards.

References

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