Inflation, debasement and the Cantillon effect

Wonder

1. When new money is created, who spends it first?
2. Can prices rise for one group while staying flat for another?
3. Is a slow, steady loss of purchasing power a cost, a feature, or both?

Explore

1. Richard Cantillon, an Irish-born banker in Paris, wrote his Essai sur la Nature du Commerce en Général around 1730; it was published in 1755, two decades after his death. He had made a fortune during John Law’s Mississippi scheme (1716–1720), when Law’s bank issued notes on a vast scale and Paris went through a speculative mania and collapse. Cantillon watched what the flood of money did, and in what order.
2. His point was that new money never spreads evenly. It enters through particular hands, such as a mint, a bank, a government contractor or a borrower, and they spend it before prices have adjusted. As it passes outward it raises prices in the markets it reaches first. Those reached last, typically people on fixed wages or savings, face higher prices before their incomes catch up. Later economists named this the Cantillon effect.
3. Debasement is the older form of the same transfer. A ruler who clipped coins or cut their silver could spend the new coins at face value before the market discounted them. Inflation does the same with paper and digits. John Maynard Keynes wrote in 1919: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
4. Today new money enters mainly through bank lending and central bank operations, including the large-scale asset purchases (quantitative easing) used after 2008 and in 2020. These act first on the prices of financial assets: bonds, then equities and property. Economists dispute how large the distributional effects are, but asset holders and early borrowers generally stand ahead of savers holding cash and workers on fixed wages.
5. Inflation compounds. Most major central banks target about 2% a year; at that rate purchasing power halves in roughly 35 years. Since the Federal Reserve was founded in 1913, the US dollar has lost more than 95% of its purchasing power as measured by the consumer price index. In extreme cases the process runs away: in November 1923 one US dollar bought about 4.2 trillion German marks.
6. Bitcoin’s issuance is new money too, and it also has first recipients: the miners who earn each block subsidy. The differences are that the schedule is public and fixed in advance, anyone can compete to earn it, and it halves every 210,000 blocks. Since the April 2024 halving, new issuance runs below 1% of supply a year and continues to fall. The Cantillon effect depends on discretion over who receives new money and when; Bitcoin removes the discretion, not the issuance.

Key facts

Exercise nine, six, three, one

Fact check

Dates, figures and claims checked against the published sources listed below.

• R. Cantillon, Essai sur la Nature du Commerce en Général (1755)
• A. E. Murphy, Richard Cantillon: Entrepreneur and Economist (1986)
• J. M. Keynes, The Economic Consequences of the Peace (1919)
• US Bureau of Labor Statistics, Consumer Price Index
• Bitcoin Core, GetBlockSubsidy (block subsidy schedule)