The Cantillon Effect Definition
The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The term originates from the eighteenth-century economist, Richard Cantillon, who noted that the effect of money supply changes would flow through an economy in a non-uniform manner, directly impacting wealth distribution.
The Cantillon Effect Key Points
- The Cantillon Effect explains how increased money supply doesn’t equally distribute throughout the economy, impacting certain sectors earlier and more significantly.
- The sectors that receive the new money earlier see prices rise before other sectors, leading to an alteration in wealth distribution.
- In the world of crypto and blockchain, Bitcoin operates in contradiction of the Cantillon Effect as its supply isn’t under the control of a central entity and is evenly dispersed.
What is The Cantillon Effect?
The Cantillon Effect can be traced back to the first infusion of gold and silver from the New World into the Habsburg economy of Spain. As precious metals increased, the abundance of gold and silver resulted in a consistent rise in prices, thereby demonstrating an early example of inflation.
Who Benefits from The Cantillon Effect?
Typically, the wealthy and those closest to the money creation center benefit from the Cantillon Effect. These benefited elites can borrow and spend the new money before inflation has had a chance to take effect and raise the cost of goods and services.
When Does The Cantillon Effect Occur?
The Cantillon Effect occurs whenever there is a change in the money supply. This effect might occur when a central bank, like the Federal Reserve, decides to inject money into the economy, causing the balance of economic power to shift in favor of those who receive the new money first.
Where Does The Cantillon Effect Apply?
The Cantillon Effect is ubiquitous and applies anywhere there is an economy with a central authority manipulating the money supply. Its principles ring true in traditional finance and in countries where political and financial institutions have significant power over monetary policy.
Why is The Cantillon Effect Important?
This economic phenomenon illuminates just how the ownership of wealth can shift when the money supply increases. The Cantillon Effect demonstrates how the modification of money supply by a central bank can cause disparities in wealth and consumption.
How Does The Cantillon Effect Work in Crypto?
The Cantillon Effect does not directly apply to Bitcoin or other decentralized cryptocurrencies. The supply of Bitcoin, for example, is algorithmically defined, meaning that no central entity can manipulate the number of tokens in circulation. Its egalitarian way of distribution contrasts the uneven dispersion of new money in traditional economies, challenging the consequences brought by the Cantillon Effect.
