how inflation steals from the poor and gives to the rich

The Cantillon effect is named after the 18th century economist Richard Cantillon. It describes how newly created money flows through the economy, affecting different sectors and different social classes differently. When a central bank like the Federal Reserve throws new money into the economy – often through quantitative easing or low interest rates – the new money is not distributed equally among the participants in the economy, writes the portal SchiffGold.

Instead, it produces effects that affect different people in different ways. Often the effects are favorable to the rich and unfavorable to low-income people. Austrian School economists use Cantillon’s observations to criticize monetary policy, especially how it increases inequality and distorts prices.

To understand the Cantillon effect, one should understand the mechanics of money supply expansion. When a central bank creates new money, it typically flows first to financial institutions, corporations, and government agencies. This is mainly done either through the purchase of bonds or through loan programs. It is the aforementioned institutions that get first access to the newly created money, which gives them an advantage: they can use it before the increased money supply is reflected in the increase in prices. By the time that money reaches the wider economy, prices may have already risen. However, the price increase reduces the real wages and purchasing power of average consumers.

The Cantillon effect and inflation

This phenomenon is directly related to inflation. When new money is created, it often leads to an increase in the general price level in the economy. However, this effect is neither immediate nor evenly distributed. For those at the top of the wealth hierarchy, the newly created money creates multiple income opportunities. They can buy stocks, real estate or commodities, for example, before inflation hits and prices rise.

However, for the average worker or consumer, inflation manifests itself in a much more harmful way. By the time the new money ends up in the real economy and the wider public, the prices of essential goods and services have already risen – be it housing costs, food or fuel. This reduces the purchasing power of people’s wages and savings.

Thus, the Cantillon effect highlights one of the main arguments against inflationary monetary policy: it benefits those who have first access to the newly created money. However, this happens at the expense of those who do not have this access. The wealthiest people, companies and financial institutions get this money first because they have the opportunity to invest in assets whose value growth exceeds inflation. Those at the bottom of the economic ladder must experience an increase in expenses that is not offset by a proportional increase in income. This means a decrease in purchasing power.

It exposes the injustice of the current system

From the perspective of the Austrian school, this effect reveals the unfairness inherent in the fiat currency system. If the money supply can be increased with just one decision, the purchasing power of the currency will steadily decline, harming those who depend on stable prices to survive.

Economists of the Austrian school support the restoration of guaranteed money. For example, the restoration of the gold standard is supported because it limits the ability of central bankers to artificially increase the money supply. In a system with guaranteed money, prices would be more stable, thereby helping to maintain the purchasing power of wages and savings.

The Cantillon effect aptly illustrates how inflationary monetary policy can have very harmful social consequences. This underscores the Austrian School view of central bank policy, which may have noble intentions, but which increases inequality and amplifies boom and bust cycles.

For the poor and working class, inflation means a decline in purchasing power, economic security and social mobility. If, instead of the central bank, the money supply was controlled by the markets (through the free formation of interest rates), economic growth would be more sustainable in the long term and the resulting increase in wealth would be more evenly distributed. This would free economies from the distortions and inequalities inherent in inflationary policies.