The Cantillon Effect and Who Gets the Money First

Richard Cantillon was an Irish-French economist and banker who, in the 1730s, wrote what is arguably the first systematic treatise on economics. His Essai sur la Nature du Commerce en Général, published posthumously in 1755, contained an observation so straightforward that it should not have taken three centuries to become common knowledge: when new money enters an economy, it does not arrive everywhere at once. It arrives somewhere first. And the people who receive it first benefit at the expense of those who receive it last. Cantillon observed this in the context of Spanish gold flowing from the New World — the miners, merchants, and crown officials who handled the gold first saw their purchasing power rise, while ordinary citizens experienced rising prices without a corresponding rise in income. The money reached them last; the price increases reached them first.

This insight, now called the Cantillon Effect, is not a conspiracy theory. It is a description of how money actually moves through an economy. It requires no bad actors, no secret meetings, no coordinated scheme. It requires only that new money enters the system at a specific point rather than being distributed uniformly — which is always the case, in every monetary system, under every set of institutional arrangements. The question is not whether the Cantillon Effect exists. The question is how large it is, who it benefits, and whether the current system makes it better or worse.

Why This Matters

We are accustomed to thinking about inflation as a single number — the Consumer Price Index rises by three percent, or five percent, or eight percent, and we treat that number as though it describes a uniform experience. It does not. Inflation is not a weather system that falls equally on everyone. It is a transfer mechanism. When the money supply expands, purchasing power moves from one group to another, and the direction of that transfer is determined by the order in which the new money arrives.

Mises, in Human Action, formalized this insight within Austrian business cycle theory. Mises argued that credit expansion by the banking system distorts the structure of production by sending false signals about the availability of savings. But the distributional point is simpler and more immediately relevant to your life: new money benefits its early recipients because they can spend it before prices adjust. By the time prices have risen to reflect the new supply, the late recipients — wage earners, savers, pensioners — find that their existing money buys less than it did before. No one stole from them. The mechanism did.

Nassim Nicholas Taleb, in Antifragile, described a related phenomenon: systems that socialize losses while privatizing gains. The financial system, Taleb argued, is structured so that risk-takers capture the upside of their bets while taxpayers absorb the downside. The Cantillon Effect is the monetary expression of this same asymmetry. The institutions closest to the source of new money capture the upside of monetary expansion; the general public absorbs the cost through reduced purchasing power.

How It Works

The modern transmission mechanism of the Cantillon Effect operates through a specific, traceable chain. Understanding each link in that chain is essential for seeing why the effect is structural rather than accidental.

Step one: The Federal Reserve creates new reserves.When the Fed conducts quantitative easing or other expansionary operations, it creates digital reserves and uses them to purchase assets — primarily U.S. Treasury bonds and mortgage-backed securities. These purchases are not made on the open market in the way you might buy a stock. The Fed transacts with a specific group of institutions called primary dealers — approximately two dozen large financial firms authorized to trade directly with the Fed .

Step two: Primary dealers receive the new money.The primary dealers — firms like JPMorgan Chase, Goldman Sachs, and Bank of America — are the first recipients of the newly created reserves. They now hold cash where they previously held bonds. This cash must go somewhere. Much of it flows into financial markets: equities, corporate bonds, real estate, and other assets. The effect is to bid up the prices of these assets before the broader economy has registered the increase in money supply.

Step three: Asset prices rise.As newly created money flows into financial markets, asset prices increase. Stock indices climb. Bond prices rise and yields fall. Real estate valuations increase, particularly in markets favored by institutional investors. This is not speculative; it is the observable consequence of more money chasing a finite supply of assets. The S&P 500 rose approximately 114 percent from its March 2020 low to its peak in late 2021 , a period during which the Fed expanded its balance sheet by roughly $4.8 trillion .

Step four: Asset holders grow wealthier. The rising prices benefit those who already own assets. If you held a diversified stock portfolio in early 2020, your net worth likely increased substantially over the following two years. If you owned real estate, the value of your property rose. If you held bonds purchased before the rate cuts, their market value increased. The common thread is ownership: you had to already be holding assets to benefit from asset price inflation. The mechanism rewarded the already-wealthy not because they were smarter or harder-working, but because they were closer to the point of entry for new money.

Step five: Consumer prices adjust. Eventually — and the lag can be months or years — the increased money supply filters through to consumer prices. Groceries cost more. Rent increases. Gas prices rise. By this point, the early recipients of the new money have already purchased their assets at lower prices. The late recipients — the wage earner at the grocery store, the renter, the retiree on a fixed income — experience only the cost side of the equation. Their wages may eventually rise, but the adjustment is slow, partial, and always trailing the price increases that preceded it.

Step six: The gap widens. Each round of monetary expansion repeats this sequence, and each repetition compounds the distributional effect. The Federal Reserve has engaged in multiple rounds of significant balance sheet expansion since 2008. Each round has followed the same pattern: new money flows to financial institutions, then to asset markets, then — eventually, partially — to the real economy. The cumulative effect is a persistent transfer of purchasing power from those who earn wages to those who hold assets.

The Practical Response

The 2020-2023 period provides the clearest modern case study of the Cantillon Effect in action. In response to the COVID-19 pandemic, the U.S. government enacted fiscal stimulus measures totaling approximately $5 trillion , while the Federal Reserve expanded its balance sheet by approximately $4.8 trillion through asset purchases . The combined monetary and fiscal response was unprecedented in peacetime history.

The distributional consequences were immediate and dramatic. Between January 2020 and the end of 2021, the total wealth of U.S. billionaires increased by approximately $2.1 trillion . Home prices, as measured by the Case-Shiller National Home Price Index, rose approximately 34 percent between March 2020 and March 2022 . Stock market indices reached all-time highs repeatedly throughout 2021.

Meanwhile, real wages — wages adjusted for inflation — declined for most workers during the same period. The consumer price index rose 7 percent in 2021 and 6.5 percent in 2022 , outpacing nominal wage gains for much of the workforce. The cost of housing, both purchased and rented, increased faster than incomes in virtually every major metropolitan area. A working family that had been saving for a down payment in 2019 found, by 2022, that the goal had moved further away, not closer — despite having saved more dollars, those dollars purchased less house.

This is the Cantillon Effect made concrete. It is not abstract theory. It is the lived experience of millions of people who watched asset prices soar while their real purchasing power declined. And it was not caused by greed, corruption, or conspiracy. It was caused by the mechanics of how new money enters an economy — mechanics that are openly documented and publicly acknowledged by the institutions that operate them.

Ammous, in The Bitcoin Standard, argued that this distributional effect is not a side effect of fiat monetary policy but its central feature. The ability to create new money is the ability to redistribute purchasing power, and the redistribution consistently flows in the same direction: from those furthest from the money spigot to those nearest to it. You do not need to accept Ammous’s full argument to recognize the pattern. You need only look at the data.

For you, the practical response begins with recognition. If the Cantillon Effect is structural — if it is built into the mechanics of the monetary system rather than being an occasional aberration — then holding cash is a losing strategy over any meaningful time horizon. Cash is the asset of last resort in a Cantillon world; it is the thing that loses value as every other asset gains it. This does not mean you should hold no cash. It means you should hold cash deliberately, in amounts calibrated to your near-term needs, rather than as a default store of value.

The second practical response is to acquire assets. This is not investment advice — we are not recommending specific assets, allocations, or strategies. It is structural advice: in a system where new money flows first to asset markets, holding assets is the only way to be on the receiving end of the Cantillon transmission rather than the paying end. Whether those assets are equities, real estate, commodities, or something else depends on your circumstances and judgment. The principle is the same regardless of implementation.

The third practical response is to understand that this dynamic is not permanent or inevitable. It is the product of specific institutional arrangements — a fiat currency, a central bank with discretionary authority over the money supply, a financial system structured around primary dealers and large institutions. Different arrangements would produce different distributional outcomes. Whether better arrangements are politically achievable is a separate question. But recognizing that the current arrangement is a choice, not a law of nature, is the first step toward evaluating alternatives honestly.

What To Watch For

Watch for the framing of monetary policy as a technical exercise conducted by neutral experts. Central banking is not neutral. Every monetary policy decision has distributional consequences, and those consequences are predictable. Lowering interest rates benefits borrowers at the expense of savers. Quantitative easing benefits asset holders at the expense of cash holders. These are not unintended side effects; they are the primary mechanisms through which monetary policy operates. The people making these decisions may be well-intentioned, competent, and acting within their mandate. The distributional outcomes remain what they are.

Watch for the conflation of asset price inflation with prosperity. When stock indices reach all-time highs, the headlines announce that “the economy” is doing well. But asset price inflation driven by monetary expansion is not the same as genuine economic growth. Genuine growth means more goods, more services, more productive capacity. Asset price inflation means existing assets cost more dollars, which may reflect genuine growth but may also reflect the fact that there are simply more dollars in circulation. The distinction matters because it determines whether the prosperity is real or illusory — whether the pie is actually bigger, or whether the slices are just being measured with a smaller ruler.

Watch for the argument that the Cantillon Effect is a conspiracy theory. It is not. It was first described by a banker and economist nearly three hundred years ago. It is acknowledged in mainstream economics, though often under different names — “distributional effects of monetary policy,” “wealth effects,” “portfolio rebalancing channel.” The Federal Reserve’s own research papers discuss the distributional consequences of QE . Calling the Cantillon Effect a conspiracy theory is like calling gravity a conspiracy theory: the phenomenon exists whether you name it or not.

Finally, watch for the impulse to blame individuals for what is a systemic issue. The primary dealer who buys Treasury bonds from the Fed is not cheating. The hedge fund manager who purchases assets with cheap credit is not stealing. The real estate investor who buys rental properties in a low-rate environment is not exploiting anyone. Each is responding rationally to the incentive structure of the system. The problem is not that people act in their self-interest. The problem is that the system translates self-interested action into a consistent, one-directional transfer of purchasing power from those who earn wages to those who hold assets. Fixing this requires changing the system, not condemning the people who operate within it.

The Cantillon Effect is, ultimately, an argument for sound money. When new money cannot be created at the discretion of a central authority, the Cantillon transfer is minimized. When money is scarce and its supply predictable, the first-mover advantage diminishes because there is no new money to be first in line for. This does not eliminate all inequality or all unfairness; no monetary system can do that. But it removes one specific, identifiable, and quantifiable mechanism by which purchasing power is systematically transferred from the many to the few. That is not a complete solution. It is a necessary starting point.

This article is part of the Sound Money Principles series at SovereignCML. Related reading: What “Sound Money” Actually Means, A Short History of the Gold Standard, How Fiat Currency Actually Works