# The Cantillon Effect and the Economy Author: [[Arkadiusz Sieron]] ## Review This book helped me clarify my thoughts on the impact of bank-created money and the channels through which it happens. The first-round effects of money creation and distribution on price and production structures was first referred to by Cantillon, hence the name 'Cantillon Effect'. I had never heard of Cantillon before reading the author's appendix chapter on him. Richard Cantillon was an Irish banker/investor during the early 18th century who has an understanding of economics and money that is rare even today. He only ever wrote one public document which describes a number of economic phenomena better than most of what came after him. It was one of the few sources cited by Adam Smith. The extremes of monetary dynamics over the course of COVID have highlighted the significance of understanding the true nature of the monetary system, in particular the Cantillon Effect. The author provides a categorization and description of the ways money supply can change, and how the changes in money supply in different parts of the economy lead to different effects. Too much of academic economics focuses on handwavy descriptions of cause and effect. Understanding the Cantillon effect is about understanding how uneven changes in cash balances of different groups changes their purchasing power, impacting only the prices of goods they are consuming or investing into. The last few chapters of the book were my favourite. He describes the likely impact of the Cantillon effect on asset bubbles and as the origin of the business cycle. I agree with him that a closer study of the changes in composition of bank balance sheet could help us understand the processes behind the different type of business cycles. I also appreciated that the author related the cantillon effect to the real function of the banking system (through the perspective of credit creation theory) rather than intermediary or other descriptions of banking. It could have been made better by relating the Cantillon effect to changes in bank regulation which channels credit into certain parts of the economy. For example (and from my current understanding), the change in risk weighting of Basil regulation funneled more credit into the mortgage market starting in the late 80s. Generally I think the book could be have a wider readership by skipping a lot of the history of economic thought (and bad theories) and by trying to relate the Cantillon effect to periods and events in history and to our everyday experience. ## Key Ideas ## Related