Street signs indicating 'Deflation' and 'Inflation' directions, metaphorically presenting the economic choices between deflationary and inflationary policies, relevant to discussions on the Cantillon Effect and cryptocurrency impact.

Can Crypto Flip the Script on the Cantillon Effect?

A primer on how the Cantillon Effect can benefit those with early monetary access — in relation to how various digital assets and non-state cryptocurrencies like bitcoin (BTC) can democratize monetary access in a fairer and more transparent way.

Richard Cantillon’s Monetary Supply Insights: A Glimpse into Economic Expansion

Irish economist and investor Richard Cantillon delved into the mechanisms of domestic money supply growth during his time when currencies were tethered to precious metals like gold and silver. His findings highlighted two primary drivers of this expansion: the influx of money from foreign nations and the discovery of new silver and gold mines. Published shortly before his tragic demise in 1734, Cantillon's seminal work, "Essai sur la Nature du Commerce en Général," provided valuable insights into the economic consequences of monetary expansion.

Key takeaways from Cantillon's essay revolve around the impact of monetary expansion based on where the newly injected money entered the economy, the initial controllers of these funds, and the flow of money within the economic ecosystem. His work also foreshadowed what we now commonly recognize as the business cycle, describing the economic disturbances associated with additional capital.

For instance, Cantillon observed that when new capital reached consumers, it led to rising interest rates. Conversely, when this fresh capital found its way into the hands of entrepreneurs, interest rates tended to decrease. This phenomenon occurred because entrepreneurs, armed with additional capital, reduced their need for loans, while consumers typically used the newfound resources to enhance their consumption of goods and services. Consequently, entrepreneurs sought loans to meet the heightened consumer demand, further affecting interest rates. Regardless of the initial recipients of the new capital, it exerted upward pressure on local prices. Among Cantillon's many pioneering insights, the Cantillon Effect stands out as his most renowned contribution to economics.

Cantillon observed that when new capital reached consumers, it led to rising interest rates. Conversely, when this fresh capital found its way into the hands of entrepreneurs, interest rates tended to decrease.

Graphic illustration of stacks of silver coins with financial growth indicators, such as arrows and charts, symbolizing monetary expansion and the Cantillon Effect in macroeconomics. How Early Recipients Gain While Others Pay the Price of Inflation.

Understanding the Cantillon Effect: Early Advantage in a Growing Money Supply

The Cantillon Effect is a concept that explains how individuals who receive new money early on have a valuable time-sensitive opportunity for investment or purchasing goods before the ensuing price hikes caused by an expanding money supply. At its core, the Cantillon Effect suggests that those who access the money sooner reap greater benefits, while those who receive it later, or not at all, suffer financial setbacks due to the resulting higher prices.

The initial recipients of this influx of money allocate it according to their preferences, causing certain products to experience price surges. While sellers of these products enjoy favorable outcomes, the rest of the population grapples with elevated prices. In the 1700s, this effect relied on additional precious metals, obtained through mining or foreign imports. However, in the modern era of fiat currencies, the Cantillon Effect has taken on new dimensions, both benefiting and disadvantaging diverse groups in the 20th and 21st centuries.

The Cantillon Effect and Its Impact on Fiat Currency

In an era where fiat currencies are no longer tethered to precious metal reserves, many national currencies have grappled with persistent inflation. This phenomenon arises from governments' ability to effortlessly print money, often without cost, and determine the initial recipients. Typically, newly created capital is first funneled to a country's central bank, then directed towards private banks, asset holders, and select individuals and organizations with privileged access to the financial system. Finally, it reaches the hands of the general populace.

Those who receive this new capital early on have a unique opportunity to spend it on assets and goods before market prices adjust to accommodate the increased money supply. This allows banks and other privileged entities to make acquisitions at a reduced cost compared to later recipients. Meanwhile, as the new money circulates among ordinary citizens, they may find themselves purchasing goods at relatively higher prices. This aspect is particularly concerning because the primary beneficiaries of this financial phenomenon are often the wealthiest, while those most adversely affected are typically individuals with limited capital to spare. The price adjustments attributed to the Cantillon Effect can take months, or even years, to be fully absorbed and understood by those most impacted.

While the Cantillon Effect can result in subtle and gradual price increases that may not become apparent for several months, there are instances where its effects manifest rapidly. In cases of hyperinflation, countries experience an accelerated version of this behavior, with citizens incentivized to spend their money immediately, primarily on essential items like food, to preempt price hikes. Waiting even a short period—be it a month, a week, or even a few hours—may lead to a noticeable decline in purchasing power in real-time.

The primary consequence of the Cantillon Effect is inflation, which can be perceived as a regressive tax affecting a nation's citizens' purchasing power. As monopolistic fiat monetary expansion often results in unequal and fragile monetary systems, critics of such expansion and the associated inflation have been actively seeking viable alternative solutions.

Contrasting footwear depicting economic disparity with one foot in a tattered, worn-out shoe and the other in a polished dress shoe, symbolizing the Cantillon Effect's impact on purchasing power and wealth distribution. Unmasking the Cantillon Effect: Early Birds Win, Latecomers Lose in the Inflation Game

Cryptoeconomics and the Cantillon Effect: Seeking Financial Equity

The Cantillon Effect essentially illustrates the emergence of an unlegislated regressive tax, impacting those earning wages in fiat currency or holding a significant portion of their savings in it. While contemporary perspectives often view money as a government product, a historical examination reveals its traditional association with tangible commodities like precious metals rather than governments. Remarkably, countries offering diverse currency options have typically enjoyed greater price stability and societal equity. Evading the Cantillon Effect necessitates a fundamental reframing of the concept of money along these historical lines. 

Numerous cryptocurrencies and digital assets aim to decouple new money creation from political influence and state control. This paradigm shift can promote fairness when digital asset creation is predetermined, transparent, predictable, and accessible to all. Additionally, most cryptocurrencies enforce a maximum supply, such as Bitcoin's 21 million BTC cap. One strategy to safeguard your savings against unequal money creation and distribution involves partially opting out of nation-backed currencies in favor of decentralized non-state alternatives, including bitcoin (BTC), and a myriad of other crypto options. 

In stark contrast to fiat currency, the expanding yet constrained BTC supply is open to all participants without preferential treatment for banking institutions or well-connected insiders. From an investment perspective, BTC and other cryptocurrencies offer a compelling historical asymmetric upside. As fiat currencies confront ongoing debasement, populations increasingly seek more robust monetary alternatives like gold, BTC, and other cryptocurrencies. 

As evident in BTC's price trajectory—from $200 USD to over $28,000 in the past decade, with even higher peaks—the early and mid-2010s investors have realized substantial gains. However, many experts believe that we are still in the early stages of the burgeoning digital asset market. Some anticipate significantly higher price levels as crypto adoption continues to expand globally, spanning both developed and developing nations. 

For individuals grappling with unstable local currencies, one option is to transition from a local fiat currency to a more "stable" fiat currency, as exemplified by the dollarization or pseudo-dollarization adopted by various nations. Nevertheless, this approach often merely mitigates the impact of stronger inflation elsewhere, rather than eliminating it. 

Alternatively, individuals opt for precious metals, cryptocurrencies, or a combination of both. Owning these hard assets can potentially safeguard purchasing power, in contrast to the swift erosion of purchasing power experienced with new fiat currency issuance. Moreover, cryptoassets like Bitcoin can offer an intriguing reversal of the Cantillon Effect: in this scenario, smaller investors, positioned early on, have the opportunity to establish their stake, while larger institutional investors await the development of the requisite regulatory framework, custodians, and on/off-ramps. Although this infrastructure is rapidly evolving, the "early adopter" window for crypto investments remains relatively open compared to other markets. 

Regardless of your chosen approach, comprehending the mechanics of the Cantillon Effect can inform your strategy to counter its effects and strive for financial equity.

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Kade Almendinger

Kade Almendinger

Kade Almendinger, an accomplished cryptocurrency investor, consultant, and strategist, began his journey in Bitcoin in 2012, fueled by his interest in Austrian economics. Transitioning to a full-time career in the crypto sector in 2018, he has since lent his expertise to numerous blockchain startups, notably in Seoul, utilizing his linguistic skills in Korean and English. Kade co-hosted a crypto-centric podcast between 2019 and 2021 and actively participates in major crypto events in New England. Apart from his crypto engagements, he is passionate about macroeconomics, physical fitness, investing, language learning, biking, craft beer, and music, embodying his commitment to continuous growth and development.