The Cantillon Effect, named after 18th-century economist Richard Cantillon, describes the way newly created money flows through an economy, affecting different sectors and social classes unevenly. When a central bank like the Federal Reserve injects new money into the economy - often through measures like quantitative easing or low interest rates - this money doesn’t distribute itself evenly. Instead, it creates ripple effects that impact different people in distinct ways, often favoring the wealthy and disadvantaging lower-income individuals. The Austrian school of economics uses Cantillon’s observations as a lens to critique monetary policy, particularly in how it exacerbates inequality and distorts prices.

To understand Cantillon effects, consider the mechanics of monetary expansion.

When the central bank injects new money, it usually flows first to financial institutions, corporations, and government contractors, often through bond purchases or direct lending programs. These recipients gain early access to freshly created money, which gives them an advantage: they can spend or invest it before prices have risen to reflect the increased money supply. By the time this money trickles down to the broader economy, prices may have already increased, diminishing the purchasing power of wages and savings held by average consumers.