They Buy Gold: A Brief History of Pawn Shops

You see them littering strip malls, and you know they allegedly pay top dollar for scrap gold. How well do you know the history and nuances of your local pawn shops, though? Let’s take a look behind the pawnbroker’s counter.

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Pawning Some History

Pawnbroking may not be known as the world’s oldest profession, but it certainly belongs in the discussion. Chinese records show that the practice of securing loans on property date back all the way to the dawn of the Western Han Dynasty in 206 BC.

These Chinese pawn shops were considerably more softhearted than their modern Western counterparts; borrowers could take up to three years to pay off their loans at modest three-percent interest rates.

Meanwhile, European pawnbroking began to flourish during the Middle Ages. The Norman Conquest introduced the practice to England, and the Lombardy region of northern Italy was another hotbed of pawnbroking. In fact, pawnbroking became so strongly identified with Lombardy throughout Europe that the term “Lombard” gradually became synonymous with “pawn shop” and “Lombard banking” was a widespread term for pawnbroking.

Pawning your possessions wasn’t just for the nobility, though. Many early pawnbroking efforts came in the guise of aid to the poor. The Catholic Church approved of pawn shops on the condition that they lend money to the poor at reasonable interest rates. England’s biggest pawnbroking operation in the 18th century was the Charitable Corporation, which was chartered in 1707 “to lend money at legal interest to the poor upon small pledges.” Within 25 years, though, widespread fraud and embezzlement from within the corporation bankrupted it.

Despite these high-profile customers and ostensibly noble aims, the spread of pawnbroking throughout Europe wasn’t an entirely smooth process. By the 17th century, pawnbrokers had developed shabby reputations as outlets for stolen merchandise, and starting in 1785 England began tightly regulating the industry. A London pawnbroker had to shell out £10 for a license and could only charge 0.5-percent interest rates, a figure that gradually climbed over the next few decades.

Where’s the Profit?

The mechanics of a typical pawn transaction are pretty simple. A customer brings in an item and uses it as collateral to obtain a relatively small cash loan. The customer than has a fixed period of time, usually a few months, in which he can return to the shop to pay off the loan with interest and retrieve the item. If the customer doesn’t pay off the loan, the item becomes the property of the pawnbroker, who then sells it in his retail shop.

Most people actually return to pay off their loans and pick up the item they pawned; in industry slang this process is known as “redemption.” Pawn Shops Today, which advertises itself as “The National Voice of the Pawn Industry,” pegs the national redemption rate on pawn loans at around 80 percent. Other stores like New York’s Pawn Shop of America claim redemption rates as high as 95%.

How are pawn shops staying in business if so little of the merchandise they bring in is hitting the stores’ shelves? The loans they’re making have pretty hefty interest rates. American pawn shops have their interest rates set at the state level, but they’re all fairly stout. In New York, for example, the rate is 4 percent per month, which adds up to a 48 percent annual rate. In North Carolina, the number is 2 percent per month, but additional storage and handling fees can be tacked on to raise the total to a staggering 20 percent per month.

Moreover, when loans go unredeemed pawnbrokers get their retail merchandise at bargain rates. A typical pawn loan is only for a quarter to a third of an item’s resale value, so there’s a pretty nice margin built into any item that ends up going out for sale in the shop.

The Story Behind the Symbol

Another story traces the symbol’s origins back to the patron saint of pawnbrokers, Saint Nicholas. (Yup, the Santa Claus guy is also looking out for your local pawn shop.) According to folklore, St. Nicholas once gave three small bags of gold to a peasant so the man wouldn’t have to sell his three daughters into slavery. The three bags of gold became stylized as three gold balls, and the symbol stuck to the saint’s beloved pawnbrokers.