Cantillon Effect

The Cantillon Effect explains how newly created money doesn’t affect everyone in the economy equally. When a central bank injects new fiat currency—money not backed by a commodity like gold—it doesn’t spread evenly. Instead, it enters the financial system at certain entry points, usually through commercial banks and large financial institutions.

Those who get access to this new money first—typically banks, corporations, and asset owners—can use it to buy goods and assets at pre-inflation prices. Because the extra money hasn't yet worked its way through the economy, they enjoy a temporary advantage. By the time the new money reaches the average consumer, prices for many goods and assets have already risen in response to the increased demand and supply of money.

This staggered impact causes price distortions: some sectors or individuals benefit disproportionately while others, especially those furthest from the money creation source, lose purchasing power. The Cantillon Effect refutes the idea that inflation simply causes prices to rise evenly for everyone.

Named after Richard Cantillon, an economist from the 18th century, this principle highlights how the pathway of money creation results in wealth gains for those nearest the source, often widening economic inequality. As money travels from central banks to commercial banks to investors and finally to regular citizens, those further down the chain are more likely to see higher prices without the corresponding benefits from early access to new money.

Over time, this dynamic has contributed to growing disparities in wealth, with top earners seeing larger gains closely tracking periods of rapid money supply growth, while the financial position of everyday people lags behind. In effect, this process acts as a stealthy, regressive tax on the public’s purchasing power, benefitting those already closest to the financial system.