The Cantillon Effect

What Is the Cantillon Effect?

The Cantillon Effect is an economic concept that explains how changes in the money supply can affect different groups of people differently. It was first proposed by 18th-century French economist Richard Cantillon, who argued that when new money enters the economy, it does not benefit everyone equally. Instead, those closest to the source of new money—such as banks and governments—benefit most from its introduction. This unequal distribution of wealth has been referred to as “Cantillon’s Law” or “the Cantillon effect.”

The idea behind this phenomenon is simple: When a government prints more currency or increases borrowing, it creates inflationary pressure on prices and wages due to increased demand for goods and services without any corresponding increase in production capacity. Those with access to newly created funds are able to purchase assets at pre-inflation prices before their value rises; meanwhile, those further away from the source may find themselves unable to keep up with rising costs of living despite having no control over monetary policy decisions made by central banks or governments. In other words, while some individuals gain financially from such policies, others suffer losses due to decreased purchasing power caused by inflationary pressures resulting from these same policies.

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