The term Lombard banking dates right back to the Middles Ages when it referred to a type of pawnshop. Lombard takes its name from the well-to-do region of Lombardy, in North Italy, where the practice emerged.
As with many things throughout time, the Christian church had a stronghold on the money-lending business. The practice of making money without working for it was prohibited considered sinful. Pope Leo the Great banned charging interest on loans by law. However, it was not forbidden to take collateral on loans. This loophole meant that pawnshops were able to operate under contracts that agree in advance the ‘fine’ or tax for not adhering to the term of the ‘interest-free’ loan. Pawnshops were also able to use a system of sale buy-back by the ‘borrower’ where the interest is included in the repurchase price.
There were many ways of getting around the prohibition, meaning that pawnbrokers could approach risk-laden investments on a bigger scale.
So how did Jews become synonymous in the world of finance?
An interesting story, it explains the connection between Jews money lending very transparently. Returning to the Church, both Christianity Judaism ban usury (unethical money lending) within their own religion, but they do tolerate usury towards heretics. This means that Christians would lend to Jews, Jews would lend to Christians.
In the Middle Ages, bookkeeping methods were kept within families handed down through the generations, spreading along the commercial route. Christian Jesuits assumed the role of liaison between heads of state, while the Jews were more heavily involved in the goldsmith trade the early days of diamond trading.
And so to Lombard…
With the church intertwined with pawnbroking, the pawnshops in Rome saw business boom. Using the processes that originated in Lombardy, the Italian ‘Lombard’ pawnshop method became famous, the term Lombard came to represent the act of pawnbroking. Growing in influence, Lombard pawnshops spread to Cahors in France and, from there northwards, London Amsterdam.
The Lombard was firmly attached to the practice of pawnbroking, although the Protestant faith was making moves into the world of finance. The word Lombard can be seen across many Western cities, in street names or buildings.
If you are travelling to the Netherlands, look out for pawn shops, which still bear the name ‘lommerd’. If your travels take you to Poland or Russia, you will see the pawn shops are called ‘Lombard’.
It’s not only the name that exists. The Lombard credit methodology is still commonly used in banking, where banks lend against securities, such as government bonds.