What Is The Cantillon Effect?
The Cantillon effect, coined by 18th-century economist Richard Cantillon, describes the uneven effect of money printing on different segments of the economy. When new money is created, it doesn’t distribute evenly across the economy. Instead, it benefits certain individuals, groups or sectors first, often those closest to the source of new money, while the wider population faces the inflation that inevitably follows the monetary expansion. This creates economic “winners” who gain purchasing power and “losers” who see their purchasing power diminish.
How Does The Cantillon Effect Work?
The Cantillon effect occurs when those closest to the new source of money, such as governments, financial institutions, and asset holders, benefit disproportionately from money printing compared to those on the periphery of the financial system. These entities can use the new money to acquire goods, services, and assets at prevailing prices before inflation sets in. This early advantage allows them to accumulate wealth more effectively. As they spend the new money, they contribute to rising prices. Prices rise because the increased money supply outpaces the available goods and services, creating a supply and demand imbalance that adjusts to a higher equilibrium price.
By the time the new money reaches those on the periphery of the financial system, such as everyday citizens, prices have increased substantially, offering little benefit to these late recipients. In fact, they find themselves worse off since their incomes and savings lost purchasing power due to the inflation. In other words, they can buy fewer goods and services than they could before the money was printed.
In our current monetary system, the primary beneficiaries of money printing are governments, financial institutions, and wealthy individuals, while the wider population is left to bear the cost of inflation. As the money supply increases, we observe an expansion of government influence, greater financialization of economies, and a widening wealth gap. In other words, the wealthiest sectors and individuals see significant gains in their net worth, while ordinary people struggle to keep pace with the rising cost of living. This trend is evident today, with governments larger than ever before, economies deeply financialized, and wealth inequality reaching levels not seen since the Gilded Age.
The Cantillon Effect In a Chart
As an example, the chart below highlights a direct correlation between money printing (as measured by US M2) and the increasing net worth of the top 0.1% of US citizens.
Source: Jonathan Newman
What is a Cantillionaire?
A Cantillionaire is someone who amasses wealth not by creating valuable goods or services, but by capitalizing on the process of money creation. These individuals benefit from their proximity to the source of new money, allowing them to acquire assets and increase their wealth before the effects of inflation are felt by the wider economy. They thrive in an environment where monetary expansion disproportionately favors those closest to the money printer, often at the expense of the broader population.
What is the Nakamoto effect?
The Nakamoto effect, named after Satoshi Nakamoto, the pseudonymous creator of Bitcoin, represents a fundamental departure from traditional monetary systems and the Cantillon effect. Unlike traditional currencies where new money issuance primarily benefits centralized entities such as financial institutions and governments, Bitcoin introduces a novel mechanism. In the Bitcoin network, miners compete to solve cryptographic calculations and propose new blocks to the network. As a reward for their computational efforts and network contribution, miners earn newly created Bitcoin and transaction fees.
This decentralized reward system, known as the Nakamoto effect, incentivizes participation in maintaining the network's security and integrity. By tying rewards directly to computational work rather than institutional hierarchy, Bitcoin establishes a more equitable and transparent monetary system accessible to all participants, regardless of their institutional affiliations. In doing so, Bitcoin rids the world of the unfair accumulation of wealth enabled by the fiat system that has led to some of the highest levels of wealth concentration in history.