What Is the Cantillon Effect?

Developed by Richard Cantillon, The Cantillon Effect is a change in relative prices resulting from a change in the money supply. It describes the velocity of money through the economy, and the uneven effect its diffusion has on prices, wages and inflation. While the effect discusses the changes in money supply, it specifically refers to the effect of unequal access to that increased money supply. 

The Cantillon Effect is most visible in the contemporary US economy. Stimulus packages aimed at creating economic activity by increasing the money supply (Quantitative Easing) gave businesses large sums of new money, especially during the pandemic. The result was that businesses that put their affairs in order were able to repay existing debt, bought stock, and generally did what Richard Cantillon forecasted they would do with their money. 

As they did so, they drove up prices, and not just on the stock market. What’s worse is, they took money right back out of the economy again by using it to pay down debts and buy up capital goods. The public at large will see the inflation, but not most of the money.

Applying the Cantillon Effect on digital assets, its example could be observed when the price of BTC passed $60,000 for the first time back in March 2020 after the stimulus package was passed by the House. This was partially fuelled by a perception of BTC as “digital gold”, an inflation-proof asset that can’t be quantitatively eased or fractionally banked. It’s also an even greater influx of HNWI and institutional investors, seeking an inflation hedge, a safe haven, and a base for their financial and economic activities more certain than the shifting sands of the US dollar. 

Bio: Gunnar Jaerv is the chief operating officer of First Digital Trust — Hong Kong’s technology-driven financial institution powering the digital asset industry and servicing financial technology innovators. Prior to joining First Digital Trust, Gunnar founded several tech startups, including Hong Kong-based Peak Digital and Elements Global Enterprises in Singapore.