Econ Addicts

The Cantillon Effect, named after economist Richard Cantillon, describes what happens when newly created money enters an economy. During this shift, some benefit more than others, and it depends almost exclusively on a person’s proximity to the money source. For example, those in closest proximity to the banks, large asset holders, and government contractors are in the most ideal position to reap the rewards of the new monetary shift. On the other hand, those who are furthest from those wealth taps, such as the wage earners and those who save their money, benefit the least, and even more so are hurt by the monetary shift.

What happens when a new type of money is instituted in an economy?

First, the new money is created. This can be done through government action, or central banks may alter interest rates or institute quantitative easing.

Second, those in close proximity to the money get it first. They buy assets (real estate, stocks, commodities at pre-inflation prices. They gain a disproportionately large share of wealth and purchasing power.

Third, asset prices begin to inflate. Real-estate, stocks, luxury and other high-quality goods surge in price. This widens the wealth gap.

Fourth, consumer prices begin to rise. As new money circulates, the economy attempts to stabilize. Businesses will begin to raise prices. The cost of living increases. This includes the basics like food, rent, gas, healthcare, etc. The furthest from the money feel the pain first.

Fifth, Wages do not keep up. Workers’ wages often don’t rise to match inflation. Savers and retirees on fixed incomes lose purchasing power.

Lastly, political and social instability begin to rise. The public grows in frustration to the rising inequality. Populist political movements increase. The public loses trust for financial institutions, money itself, and demands political action that props up ‘the little guy.’

This cycle tends to repeat itself over and over.

Executive Order 6102 set off a powerful monetary and economic cycle that transformed the U.S. financial system. It began when President Roosevelt forced U.S. citizens to surrender gold to the government in exchange for $20.67 per ounce in 1933. The government then seized and confiscated gold, and consolidated monetary power by now controlling the nation’s gold reserves.

Months after the order went into effect, the U.S. raised gold’s price to $35 per ounce, which effectively devalued the dollar by roughly 70%. The new money flowed from the public to the state, and those in power and in proximity to that power reaped the gains.

Now that the public’s reliance on gold dwindled, the U.S. moved toward a credit-based monetary system. Government and banks gained the ability to expand the money supply through lending and spending.

Note: This marked the point at which money creation in the US became centralized and politically guided.

The government funded the programs of The New Deal, by injecting capital into the economy. Banks were able to lend significantly more using fractional reserves.

Over the next few decades, consumer prices would rise, especially post-WWII. Gold was then demonetized globally in 1971 when Nixon ended the gold standard. This completed the transition from hard money to the fiat currency we use today.

Following Executive Order 6102, the foundation was laid for a financial system that gradually shifted away from hard money toward a centrally managed fiat system. Today, that system relies heavily on central banks to control interest rates and periodically inject liquidity through quantitative easing. Asset inflation has become a built-in feature rather than a side effect. This dynamic reflects the Cantillon Effect, where those closest to the source of newly created money—banks, corporations, and government entities—benefit first, acquiring assets before prices rise. In contrast, everyday citizens, who were once forced to surrender their gold under EO 6102, now face rising costs and declining purchasing power, reinforcing wealth inequality that began with the government’s initial consolidation of monetary control.