The Cantillon Effect
Also known as: Cantillon's Effect, Money Injection Effect, First-Receiver Advantage
Formulated by Richard Cantillon (1730)
Definition
The Cantillon Effect is an economic concept explaining how newly created money does not affect everyone equally. When new money enters the economy, the first recipients (typically banks, financial institutions, and government contractors) can spend it before prices rise, gaining purchasing power at the expense of later recipients. As the money circulates and demand increases, prices gradually rise. By the time wage earners, savers, and people on fixed incomes feel any effect, they face higher prices without having received the new money first. This means money creation is not neutral: it changes relative prices, redistributes wealth from late recipients to early recipients, and benefits asset owners and financial markets while disadvantaging ordinary savers and workers. The key insight is that inflation is not simply 'prices going up': what matters is who gets the new money first.