The Cantillon Effect

Richard Cantillon was an Irish-French economist who died in 1734. Most people have never heard of him. But one observation he made nearly 300 years ago describes modern inequality more precisely than most things written this century.

Cantillon noticed that when new money entered an economy, it didn’t affect everyone equally. The people who received it first — landowners, merchants, those close to the source of money creation — could spend it before prices adjusted. They got real purchasing power. By the time the money filtered through to workers and the poor, prices had already risen to reflect the new supply. Their wages bought less.

He called this the uneven distribution of monetary stimulus. Today economists call it the Cantillon Effect.

Translated into the present day: when the Federal Reserve creates money and pushes it into the financial system, banks and large investors receive it first. They buy assets. Property values rise. Stock markets climb. The people who own those assets — already wealthy — become wealthier in real terms.

The worker receiving a salary adjusted quarterly, if at all, experiences the other side: the same money buys fewer groceries, a smaller home, a shorter holiday.

This isn’t a political argument. It’s a mechanical one. It happens regardless of which party is in government, regardless of ideology. It’s a structural feature of how money creation and distribution works in the modern economy.

The Cantillon Effect doesn’t explain all inequality. But it runs quietly in the background of every economic cycle, widening gaps without anyone pulling a lever marked make the rich richer.

Tomorrow: the official defence of inflation — and whether it holds up.

— The Daily Bit