The Cantillon Effect...

refers to the phenomenon that occurs when there is an increase in the money supply, which can lead to changes in relative prices and wealth distribution. It is named after the 18th-century economist Richard Cantillon, who first described the effect.

When central banks or governments increase the money supply, typically by implementing expansionary monetary policies like lowering interest rates or engaging in quantitative easing, newly created money does not enter the economy evenly. Instead, it is first received by certain individuals or entities, such as banks or financial institutions, who can then use this new money to invest, lend, or spend. As a result, these early recipients of new money benefit from being able to use it before the overall price levels in the economy have adjusted to the increase in money supply.

As the new money circulates through the economy, it gradually leads to an increase in demand for goods and services, which in turn can cause prices to rise – a phenomenon known as inflation. For individuals who hold a lot of cash, this inflation erodes the purchasing power of their money, making it worth less over time.

The Cantillon Effect highlights that the increase in money supply can result in wealth redistribution from those who receive the new money later in the process (or not at all) to those who receive it earlier. In other words, people holding cash or living on fixed incomes