Key Concept 5.1.3 – Development and Expansion of Financial I nstitutions

1. Key Concept 5.1.3 – Development and Expansion of Financial Institutions c. 1750 – 1900 CE

2. A. The ideological inspiration for economic changes lies in the development of capitalism and classical liberalism associated with Adam Smith and John Stuart Mill. • Scottish economist Adam Smith (1723–1790) established, in his Wealth of Nations (1776), the nature of economics in three laws:1.) That people work more productively when they have self-interest; 2.), That competition leads to a balanced marketplace; and 3.), that true supply and demand are a product of free trade. • Smith’s advocacy of this laissez-faire (“hands-off”) economics, as it came to be called, was revolutionary at the time. Simply put, Smith insisted that it is when individuals are most unburdened by trade regulation that they will be most prosperous, because a free system will allow the “invisible hand” of the economy to operate. Smith’s ideas in Wealth of Nations had enormous influence on the Western world and established economics as a science. Numerous modern nations, most notably the United States, implemented Smith’s policies and benefited from considerable economic growth.

3. The law of supply and demand is not an actual law but it is well confirmed and understood realization that if you have a lot of one item, the price for that item should go down.

4. B. Financial Instruments Expanded. • Stock Markets: The market in which shares are issued and traded, either through exchanges or over-the-counter markets. It is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance. • Insurance: A practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium. • Gold Standard: The system by which the value of a currency was defined in terms of gold, for which the currency could be exchanged. The gold standard was generally abandoned in the Depression of the 1930s. • Limited Liability Corporations: Where a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership. If a company with limited liability is sued, then the plaintiffs are suing the company, not its owners or investors.

5. C. The global nature of trade and production contributed to the proliferation of large-scale transnational businesses. • The United Fruit Company • The HSBC – Hong Kong and Shanghai Banking Corporation

6. Hongkong and Shanghai Banking Company Limited – History • After the British established Hong Kong as a colony in the aftermath of the First Opium War, local merchants felt the need for a bank to finance the growing trade between China and Europe (with traded products including opium).They established the Hongkong and Shanghai Banking Company Limited in Hong Kong (March 1865) and Shanghai (one month later). • The founder, a Scotsman named Thomas Sutherland wanted a bank operating on "sound Scottish banking principles."

7. Exit Ticket Please answer the following questions on your Edmodo page. • What are Adam Smith’s three natural laws of economics? • How would the development of financial instruments, such as the stock market and limited liability corporations, encourage the development of global capitalism?