What Is the Cantillon Effect?
The Cantillon Effect is an economic concept about how the increase in the money supply results in a change in relative prices. It's named after Richard Cantillon, an economist from the 18th century.
The Cantillon Effect is all about how new money affects those who get it first and those who get it last. People, institutions, and businesses who get the new money early on have an advantage. They can spend it or invest it before prices rise. Meanwhile, those who get the new money late, or not at all, don't enjoy the same benefits. This means that money is not distributed equally, leading to some people getting richer while others stay the same or get poorer.
Let's see how this applies to Bitcoin and other digital currencies. Bitcoin has a set rule for creating new Bitcoins. This process is called mining. Mining involves using powerful computers to solve complex problems and keep the Bitcoin network safe. This way, new Bitcoins are made at a steady and predictable rate. Because of this, Bitcoin may not have the same inequality issues that we see with the Cantillon Effect.
The traditional money system, on the other hand, works a bit differently. New money is created in different ways. One way nowadays is through a process called quantitative easing. This is when a country's central bank creates new money to buy things like government bonds. But that's not the only way. New money is also created whenever banks give out loans. No matter how it's done, the new money usually ends up first with banks and their favored customers. These folks get to use the new money before everyone else and can do so before prices increase, giving them an advantage.
The Cantillon Effect is highly relevant today because it's part of the conversation about why some people have much more money than others, and how monetary policy might make things even worse. Monetary policy is a country's central bank's strategy to control the money supply. They often aim to manage inflation, interest rates, and economic growth. So, the Cantillon Effect is crucial to understand when looking at how Bitcoin differs from regular money.
In short, the Cantillon Effect shows that who gets the new money first can shape how well people do in the economy. This idea encourages us to think more deeply about how monetary policy can help or hurt different groups of people.