What exactly is the Cantillon effect, how does it influence development – and what does Bitcoin have to do with it?
According to the so-called Cantillon effect, the expansion of the money supply leads to some people becoming richer at the expense of others. But what exactly is the Cantillon effect? One explanation.
The rich are getting richer, the poor are getting poorer. This situation seems to be becoming more and more entrenched. Why is the gap between rich and poor widening? Some economists believe this is due to the so-called Cantillon effect. But what exactly is the Cantillon effect, how does it influence the development of wealth – and what does Bitcoin have to do with it?
Explanation: What is the Cantillon effect?
The Cantillon effect describes the unequal impact of changes in the money supply on different economic participants. These can be both companies and private individuals. The effect was named after the French-Irish economist Richard Cantillon, who lived in the 18th century.
Cantillon’s key insight is that changes in the money supply do not affect the entire economy evenly or immediately. Instead, these changes spread gradually, affecting certain groups and sectors first and to varying degrees, before having an impact on the economy as a whole.
Typically, those who are the first to have access to newly created money (such as central banks, banks or certain economic actors) are the first to benefit from an expansion of the money supply. They have access to the money before it loses purchasing power due to an increase in inflation. On the other hand, those who receive the new money later suffer, as prices have then risen and the purchasing power of the money has fallen.
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The Cantillon effect illustrates that the effects of monetary policy and changes in the money supply are not neutral and can be unevenly distributed in the real economy. It is often taken up in discussions about inflation, monetary policy and the distribution of wealth.
The Cantillon effect sheds light on the unequal distribution of wealth by illustrating how changes in the money supply have different effects on economic agents. Several factors contribute to the fact that this effect tends to make the rich richer and the poor possibly poorer. Preferential access to new money plays a crucial role. According to the Cantillon effect, those who gain access to fresh money first, before it spreads throughout the economy, benefit. Wealthy individuals and institutions that already own assets often have easier access to credit and new financial resources. These resources allow them to make investments and benefit from rising asset values before inflation sets in.
The investment behaviour of the wealthy also plays a role. Individuals with significant wealth can invest in assets that benefit from changes in the money supply, including property, shares and other investment instruments. The value of these assets often rises in line with the money supply. Those who invest early, realise higher profits from these increases in value. Rich people thus often have the opportunity to protect themselves against inflation by investing their assets in a less inflation-sensitive way. In contrast, poorer sections of the population may not invest their savings in inflation-protected assets – or only to a much lesser extent – which can lead to a reduction in their purchasing power.
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Inequalities in the labour market also contribute to the Cantillon effect. In phases with changes in the money supply, highly qualified people and those with stable jobs can benefit more quickly from wage increases. Less qualified people or those in insecure employment, on the other hand, may find it difficult to increase their income to the same extent.
What does the Cantillon effect have to do with the gold standard?
The Cantillon effect is often mentioned in the context of the gold standard, a monetary system based on gold. This is because in the gold standard, the money supply is limited by the amount of gold available. New money supplies are represented by physical gold, which is mined and added to the economy. In such a system, the Cantillon effect could possibly be less pronounced, as the introduction of new money due to gold mining would be equally limited.
The gold standard is often associated with relative price stability. If the money supply is limited by the availability of gold, prices for goods and services could tend to be more stable. This could mitigate the impact of the Cantillon effect on price increases.
However, the gold standard could also create a situation in which wealthier individuals have easier access to gold and thus benefit from the advantages associated with owning this precious metal. This could also lead to an unequal distribution of wealth, as those who already own gold are more likely to benefit from new assets.
The gold standard, to which the dollar was pegged until 1971, has historically not been free of economic challenges. There are also differing opinions about its advantages and disadvantages. However, the link between the Cantillon effect and the gold standard shows how the nature of the monetary system can influence the distribution of wealth in one direction or another.
What does Bitcoin have to do with the Cantillon effect?
The Cantillon effect shows how the expansion of the money supply by central banks can have different effects on different economic actors. Bitcoin as a limited good and the Cantillon effect are therefore often mentioned in the same breath, especially when it comes to the effects of monetary expansion. With regard to Bitcoin, there are several aspects here:
Bitcoin’s decentralisation and equality of opportunity distinguish the cyberdevise from traditional currencies. As a decentralised digital means of payment that is not controlled by governments or central banks – and can only be expanded to a limited extent – Bitcoin could theoretically contribute to more even money creation in the long term. In the context of the Cantillon effect, this could mean that the creation of new money in a decentralised system like Bitcoin may be less influenced by a few institutions.
Bitcoin allows all users with internet access to participate. In contrast, traditional money supply changes can be influenced by central banks and financial institutions.
Bitcoin has a fixed maximum total quantity of just under 21 million. This makes the creation of money in this system predictable. In the context of the Cantillon effect, this could mean that those who acquire Bitcoin early are not favoured by unexpected changes in the money supply, as the supply is limited and predictable.
