Lombard Banks

Lombard Banks

Lombard banks were banks that accepted deposits of goods and issued credits on account. These credits could pass from one person’s account to another’s as a medium of exchange. The term Lombard probably came from the importance of Italian bankers in the early history of the London financial market, sometimes referred to as Lombard Street, just as Wall Street signifies the financial center of New York. In early English history, Lombard was another name for “Italian.” According to Webster’s dictionary Lombard, broadly speaking, can refer to a banker, moneylender, bank, or pawnshop.

In 1661 Francis Cradocke published a pamphlet, Wealth Rediscovered, in which he proposed the establishment of banks secured by things other than precious metals or financial assets. Among the commodities he advanced as possible securities were jewels, “rich pictures or hangings,” silks, iron, sugar, wines, tobacco, and land. He recommended dividing the kingdom into a hundred districts, and each district would have a “standing and constant Bank or Registry” that registered all lands, houses, and rents, and granted credit upon the basis of land, goods, or pawns.

In 1676 Robert Murray published a proposal for a Lombard banking scheme, entitled A Proposal for the Advancement of Trade, in which he argued for the establishment of a “Bank and Lombard united.” Under his plan people would deposit their “dead stock” in magazines, and receive credit on account that could be exchanged as money. He recommended awarding credit on account up to “two-thirds or three-fourths of their value according to the quality thereof.” In explaining the credit on account, Murray explained that:

[N]o more is required than what is already practised in Banks here and abroad, where men deposite Money and obtain the Bank-Credit, which generally passeth in Receipts and Payments without the real issuing of Money, the Money remaining as a Pawn or Ground of Security in the Cash-Chest, or else imployed by the Banker to his own Benefit.

(Richards, 1929)

The most famous economist of the era, William Petty, put in a good word for Lombard banks in his Treatise of Taxes and Contributions (1662). He wrote, “If public Loan Banks, Lombards, or Banks of Credit upon deposited Plate, Jewel, Cloth, Wooll, Silke, Leather, Linnen, Mettals, and other durable Commodities were erected, I cannot apprehend how there could be above one-tenth part of the Law-suits and Writings as now there are” (Richards, 1929). Lombard banks were sometime called Banks of Credit.

In 1682 the city of London established the Bank of the City of London, which acted primarily as a Lombard bank. Despite the noble mission of the bank, which was to pay down the city’s debt to the Orphans’ Fund, the experiment collapsed suddenly.

Lombard banks were a hybrid of pawnshops and deposit banks. Unlike pawnshops of today, Lombard banks issued credits that could circulate as money, adding to the money supply. Although pawnshops, called Lombards, had a long history, it is not clear that Lombard banks of the sort proposed in the seventeenth century ever developed far beyond the theory stage. Nevertheless, the Bank of England, created by an act of Parliament in 1694, was authorized to conduct a pawnbroker’s business, reflecting the influence of Lombard banking schemes at the time.