End the Fed The Cantillon Effect
New money doesn't arrive everywhere at once.
Named for Richard Cantillon (1680s–1734): freshly created money enters at specific points and ripples outward. Those closest to the spigot spend it before prices rise. Wage earners get it last — after the price of everything has already climbed. Watch the wave.
Animation: money originates at the Federal Reserve, reaches banks, then Wall Street and asset holders, then corporations, and finally wage earners — by which time the price level has already risen.
Illustrative model of monetary transmission. The price line rises before the wage-earner's money arrives — that gap is the hidden transfer.
A banker's insight, three centuries old
The idea is named for Richard Cantillon (1680s–1734), an Irish-French banker and economist who watched fortunes made and unmade in the speculative manias of his day. His insight was deceptively simple. Economists often model money as if a sudden increase in its supply lifts all prices uniformly, like a tide. Cantillon noticed that this is not how it works. New money does not fall on everyone at once. It enters the economy at a specific point, in specific hands, and then ripples outward — and the ripple takes time.
The mechanism, step by step
Follow a freshly created dollar. It enters not through your paycheck but through the financial system: the Fed credits banks with reserves, buys bonds from dealers, and bids up the price of the assets it purchases. The first recipients — banks, bond markets, the owners of financial assets — receive the new money before the general price level has moved. They get to spend or invest it at old prices.
As that money changes hands and circulates, prices begin to rise to absorb the larger supply. By the time the new money has worked its way down to wage earners and savers — the people furthest from the point of entry — the prices of homes, stocks, and goods have already climbed. They receive the same number of dollars they always did, only now those dollars buy less. They get the money last, and they get it devalued.
The first to touch new money spend it at yesterday's prices. The last to touch it pay tomorrow's.
Near the spigot, and far from it
Picture the distance as concentric rings. At the center, closest to the spigot, sit the primary dealers and large banks that transact directly with the Fed, and the holders of financial assets whose holdings the Fed's purchases bid upward. One ring out: corporations that borrow cheaply, and the well-collateralized who can refinance on favorable terms. Further out: ordinary borrowers. At the far edge, last to feel the warmth and first to feel the cost: wage earners, pensioners, and people who hold their savings in cash.
No one in the inner rings has to do anything wrong. The advantage is structural — a function of where you stand relative to the point of money creation, not of merit or effort. That is what makes the Cantillon Effect so quietly powerful: it redistributes wealth without ever announcing itself, and without anyone voting on it.
33 Liberty Street: where the Fed's open-market operations meet the markets first — the center of the ripple.
Why the lines crossed
This is the bridge back to the chart that opens this site. The divergence between the wealth of the top 1% and the bottom 90% is not a free-floating mystery — and it is not, the honest version concedes, caused by monetary policy alone. But run the Cantillon mechanism across three decades of asset purchases and suppressed interest rates, and a clear gradient emerges: those holding stocks, bonds, and real estate — the assets nearest the spigot — see their holdings inflate, while those holding wages and cash watch their position erode.
Compound that year after year and you get exactly the shape of the divergence chart on the homepage: two lines that pull apart in lockstep with the expansion of the money supply. The mechanics of who-gets-it-first, scaled across a generation, is the engine under the gap.