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 and 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 and 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 the risk-laden investments on a bigger scale.
So how did Jews become synonymous in the world of finance?
An interesting story, it explains very transparently the connection between Jews and money lending. Returning to the Church, both Christianity and 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 and Jews would lend to Christians.
In the Middle Ages, bookkeeping methods were kept within families and handed down through the generations, spreading along commercial route. Christian Jesuits assumed the role of liaison between heads of state, while the Jews were more heavily involved in goldsmith trade and the early days of diamond trading.
And so to Lombard…
With the church intertwined with pawn brokering, the pawnshops of Rome saw business boom. Using the processes that originated in Lombardy, the Italian ‘Lombard’ pawnshop method became famous and the term Lombard came to represent the act of pawn broking. Growing in influence, Lombard pawnshops spread to Cahors in France and, from there northwards, London and Amsterdam.
The Lombard was firmly attached to the practice of pawn broking, although the Protestant faith was making moves into the world of finance. The word Lombard can see 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 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.