The Cantillon Effect simply explained

The Cantillon Effect is an economic concept that refers to the way the distribution of new money created by a central bank affects the economy.

What is the Cantillon Effect?

Inflation leads to social injustice. Those who are close to the source of money and receive the newly created money first, usually government agencies, larger firms and financial institutions, can still use it to make purchases at the old prices.

But those recipients of wages and pensions, who receive the money last, already have to pay more for goods and services.

Richard Cantillon

This effect was named after the Irish-French economist Richard Cantillon (1680 - 1734). He wrote a manuscript showing what the increase in the money supply changes on the income and wealth of different people.

Redistribution from the Bottom to the Top

In a monetary system where unbacked fiat money is issued, as is the case around the world today, the Cantillon effect is far more pronounced than when gold, silver or ethereum is used.

This is because while the former can be arbitrarily manipulated at will by a higher central authority, this is not possible with precious metals and ethereum. Gold, silver and ethereum are physically limited by nature or mathematics and thus cannot be arbitrarily influenced.

> Learn more about Fiat Money.

Ethereum and the Cantillon Effect

This is because unlike traditional fiat money, which is issued and controlled by central banks, ethereum is decentralized and not subject to the same monetary policy measures.

Instead, ethereum's monetary policy is disinflationary and the supply of ethereum is determined by a predetermined algorithm that is clearly defined by the participants.

According to this view, the decentralized and inflation-resistant nature of ethereum can provide a more stable and equitable form of money that mitigates the negative effects of the Cantillon effect.