What is the "Cantillon effect"?

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The "Cantillon Effect" refers to the phenomenon where changes in the money supply, such as through inflation or new money creation, do not impact all economic actors equally. The term originates from the 18th-century economist Richard Cantillon, who observed that those closest to the source of new money (such as banks, governments, or large corporations) benefit more than those further away from it.

In practice, when new money enters the economy, the first recipients of this money can spend it before prices have adjusted, giving them increased purchasing power. However, as the new money circulates, prices begin to rise, and those who receive the money later (such as workers or small businesses) face higher prices without having the advantage of the initial purchasing power. This creates a distortion in wealth distribution, often benefiting the wealthy or those with financial assets, while negatively affecting lower-income individuals or those who rely on fixed incomes.

The Cantillon Effect is often used in discussions about monetary policy, central banking, and the effects of inflation on economic inequality.