Lombard banking refers to the historical use of the term 'Lombard' for a mount of piety style of pawn shop in the Middle Ages, a type of banking that originated with the prosperous northern Italian region of Lombardy. The term was sometimes used in a derogatory sense and some were accused of usury.
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 thus 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. 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 necessity for a young man who desired a future in the financial world of the Middle Ages was the ability to read and write; the methods used for bookkeeping were carefully kept within families and slowly spread along trade routes. Therefore, this knowledge was available most readily 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. The use of the term 'Lombard' for pawn shop grew slowly from city to city, and became prevalent in Cahors, southern France, from where the Christian Cahorsins moved as far North as London and Amsterdam in the 13th century; at the latter, they were called Cahorsijnen, Cawarsini or Coarsini.
15th and 16th centuries
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 resided 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 Lombards in finance became less prominent as various Protestant factions after the Reformation. 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 18th century, thus many of these streets were named with the establishment of shipping agents in those towns.
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.
- Matthew of Paris: The Usury of the Cahorsins, 1235, Medieval Sourcebook. "In these days prevailed the horrible nuisance of the Caursines, to such a degree that there was hardly any one in all England, especially among the bishops, who was not caught in their net. Even the king himself was held indebted to them in an incalculable sum of money. For they circumvented the needy in their necessities, cloaking their usury under the show of trade, and pretending not to know that whatever is added to the principal is usury, under whatever name it may be called.... " The sourcebook itself notes: "The Caursines (or Cahorsins) derived their name from the city of Cahors but the term is usually applied to money-lenders. The real Caursines were capitalist Christian bankers whose clients were the rich and powerful in society. In England their unpopularity was due to their officiating as papal brokers, and to the heavy rates of interest they charged."
- Historical Archive De Groene Amsterdammer, 1877