The Cantillon Effect – (from ChatGPT)

The Cantillon Effect is an economic concept describing how changes in the money supply affect prices and wealth distribution in a non-uniform way. It’s named after Richard Cantillon, an 18th-century economist who first observed that the first recipients of new money benefit more than those who receive it later.

Key Idea:

When new money is introduced into an economy (e.g., through central bank printing, quantitative easing, or government stimulus), prices don’t rise all at once or evenly. Instead, those who get the money first can spend it before prices go up—giving them more purchasing power. By the time the money circulates through the economy, prices may have risen, and later recipients or fixed-income earners are worse off.

Example:

Suppose a central bank prints $100 billion and gives it to large financial institutions.

1. Banks and their clients (like investors or corporations) are the first recipients.
2. They use this money to buy assets—stocks, real estate, commodities.
3. This drives up asset prices, benefiting the wealthy who already own these assets.
4. Eventually, the money trickles down to the general public through higher wages or spending.
5. But by then, consumer prices have risen (inflation), so workers face higher costs for goods without a proportional income increase.

Implications:

• Wealth Inequality Increases: Those closest to the money source gain more.
• Inflation Is Uneven: Asset prices rise before consumer goods prices.
• Policy Critique: Critics argue that central bank policies often exacerbate inequality due to the Cantillon Effect.

In Summary:

The Cantillon Effect shows that “who gets the new money first matters”—because it influences how inflation and purchasing power are distributed across society, often benefiting the wealthy at the expense of the poor and middle class.