Juli 4, 2022

What’s the ‚Cantillon Effect‘, and what does it have to do with Bitcoin?



Passionate about Bitcoin and the sustainable future of humanity

Who was Cantillon?

Richard Cantillon was a French banker and philosopher.

He recognised that fiat money is not neutral, because ‚those individuals and institutions closest to the supply of new money benefitted to the detriment of those furthest away‘.

What is the 'Cantillon Effect'?

The ‚Cantillon Effect‘ describes how an increase in the money supply affects ‚participants‘ in an economy differently.
The early recipients of newly issued money are typically the banks, followed by companies and investors. 
They spend this newly issued money on assets and goods, before inflation – caused by the same increase in the money supply – kicks in. 
During periods of inflation, asset prices rise, making asset owners even wealthier. 
Assets act as a hedge against inflation under a fiat system.  So asset owners are better able to weather periods of inflation than non-asset owners. 

By the time the newly issued money trickles down to the ‚ordinary citizens‘ in an economy, inflation will have kicked in.
These citizens are less likely to be able to afford assets, as they need to spend most or all of their income on everyday goods and services. 
Non-asset owners have no ability to hedge against inflation. Furthermore, the less wealthy are more negatively affected by inflation, as a greater proportion of their income is spent on everyday goods and services. 
Increasing the money supply in a fiat economy effectively acts as a regressive tax –  redistributing money from the poor to the wealthy.

Who controls the fiat money supply?

The central bank of a country controls the money supply in an economy. 
The mandate of the central bank is to ensure that inflation is kept stable – at around 2% – to support economic growth and job creation.

They do this by adopting either expansionary monetary policies, which increase the money supply in the economy, or contractionary monetary policies, which decrease the money supply in the economy.

Who controls Bitcoin's money supply?

Bitcoin’s money supply is written in to the code.  It is issued at a set rate with each mined block.  
The rate of issue reduces by 50% every 210,000 blocks – approximately every 4 years.   
Bitcoin’s inflation rate is currently 1.8% per annum. This will go down to 0.9% at the next halving in 2024, then continue to decrease every 210,000 blocks, until it reaches 0% in 2140.

The supply of Bitcoin can not be increased or decreased by any government, central bank, company or individual. 
Any changes to the code requires 51% agreement by all the nodes who run the code. Anyone can run a node.
Unlike fiat money, Bitcoin is  a neutral money
Bitcoin’s monetary policies affect participants of the Bitcoin system the same, irrespective of whether they are rich or poor.

Fiat v Bitcoin?

If you believe that an unlimited supply of ’soft‘ (easy to produce) money is more likely to lead to a long-term healthier economy than a fixed supply of ‚hard‘ (hard to produce) money…
If you think that monetary policy should be set by a small group of unelected individuals rather than by consensus…
If you can accept that money is not  neutral, and monetary policy designed to benefit the rich at the cost of the poor is acceptable….

… then you will probably favour the fiat system.

If you believe that a fixed  supply of ‚hard‘  money is more likely to lead to a long-term healthier econony than an unlimited supply of ’soft‘ money…
If you think that monetary policy should be set by consensus rather than by a small group of unelected individuals…
If you believe that money should be neutral, and not designed to favour any participants of an economy…

… then you will probably favour the Bitcoin system.


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