FEBRUARY 22
The Cantillon Effect
Why New Money Never Reaches Everyone at Once
The Signal
New money enters somewhere first, and the path it takes matters greatly.
The Reading
Imagine a small town where everyone has money to spend. One morning, 10,000 new units are created, but they are not divided equally. They enter through one group first. Those people can spend immediately, while everyone else still holds what they had yesterday.
As that group spends, the money moves through the town. Shops receive it, suppliers receive it, workers receive it. Some prices may rise before others because the extra spending appears first. The new money does not fall like rain over everyone at once. It travels step by step.
Economist Richard Cantillon described this idea. He explained that when money increases, it matters where it enters and how the first recipients spend it. Prices do not all change at the same time or by the same amount. In 2012, economists Wenli Cheng and Simon Angus modelled this process and showed how first recipients can gain purchasing power before later recipients.
This is called the Cantillon Effect. Creating new money is not like raising the water level evenly in a swimming pool. It is more like pouring water into one end of a river. The entry point matters. The path matters. The timing matters. Once you understand that, one question becomes impossible to ignore: who stands closest to where the new money enters?
First Principles
New money enters at specific points, not everywhere at once.
The path it takes can influence which prices change first.
Timing matters because people receive and spend new money at different stages.
Today’s Challenge
Take ten coins, buttons or small objects and place them in a row. Each represents a person. Imagine everyone begins with 100 units of money.
Now create another 500 units, but give all of it to the first two people. Imagine there are only three desirable items for sale. Who can offer the highest price first?
Now follow that money from the first buyers to the sellers, then onward. At what point do prices begin changing? What does the tenth person experience before any new money reaches them?
You have just watched the Cantillon Effect happen.
Tomorrow’s Signal
Who Gets the New Money First?