In the 18th century, French economist Richard Cantillon introduced what later became known as the Cantillon Effect, the idea that injections of new money into an economy do not lead to a uniform rise in prices. Instead, prices adjust unevenly, depending on who receives the new money first. Those closest to the source of money creation benefit earlier, while others are affected later. That same logic still applies today.
The Cantillon Effect in the Age of Quantitative Easing
27 January 2026 - 14:40 CET
The Cantillon Effect and the transmission of new money
Because new fiat money enters the economy at specific points, its impact is felt by different people and industries at different times. This process distorts relative prices and systematically benefits certain groups over others. To see this most clearly, it helps to look at the most extreme form of monetary expansion, quantitative easing (QE).
Central banks typically turn to QE when interest rates approach zero. If a recession or depression persists even after policy rates have been lowered to near zero, the central bank can no longer stimulate the economy through conventional rate cuts, a situation known as a liquidity trap. In this environment, QE is often described as a last-resort policy tool.
Quantitative easing is a monetary policy in which a central bank purchases predetermined amounts of government bonds, corporate debt, equities, or other financial assets in order to inject liquidity into the financial system. Similar to traditional open market operations, QE works by having the central bank buy assets from commercial banks and other financial institutions, pushing up the prices of those assets in the process.
This sets off a ripple effect across the financial system. By implementing QE, the central bank removes a large share of safe assets from the market and places them on its own balance sheet. As a result, private investors are pushed toward other financial securities. With fewer government bonds available, investors are forced to rebalance their portfolios into riskier assets. For example, when a central bank buys government bonds from a pension fund, the pension fund may choose to reinvest the proceeds into higher-yielding assets such as equities rather than hold cash. As demand for financial assets rises, their prices rise as well.
Japan’s experiment with open-ended QE
Japan offers a clear illustration of this process. In October 2010, under Governor Masaaki Shirakawa, the Bank of Japan began purchasing corporate shares and debt securities alongside government bonds. As part of its Comprehensive Monetary Easing program, the BOJ introduced purchases of equity ETFs, initially capped at ¥450 billion with a scheduled end date of December 2011.
A more decisive shift occurred in 2013 under Governor Haruhiko Kuroda, when the BOJ replaced this framework with Quantitative and Qualitative Monetary Easing. This new program removed both the purchase cap and the termination date, explicitly committing the central bank to open-ended ETF buying. The annual ETF purchase target was initially set at ¥1 trillion, then raised multiple times to about ¥6 trillion by March 2018. Following the COVID-19 shock, the BOJ doubled its annual ETF purchase target to ¥12 trillion on March 16, 2020.
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The market impact of this shift is visible in Japanese equities. The TOPIX suggests that early, capped BOJ ETF purchases had little effect on equity prices, with markets remaining largely range-bound through 2012. However, following the introduction of open-ended, uncapped ETF buying under Kuroda’s QQE framework from 2013 onward, market behavior changed. Drawdowns became shallower, recoveries accelerated, and even major shocks, including COVID, failed to break the longer-term uptrend.
This suggests that QE functioned as a structural backstop. By compressing risk premiums and dampening downside volatility, sustained central bank asset purchases reshaped the risk environment facing equity investors, reinforcing the advantages of financial asset ownership over time.
Wealth, Liquidity, and Monetary Regimes
So who benefits most from this process? Financial asset holders. In the United States, the M2 money supply offers a useful lens for examining Cantillon-style distributional effects because it captures the forms of money most directly expanded through the banking system and financial markets. From 1990 to 2026, M2 rose from $3.18 trillion to over $22.4 trillion, while net worth held by the top 0.1 percent increased from $1.7 trillion to $24.87 trillion, compared with a far smaller rise from $0.7 trillion to $4.25 trillion for the bottom half of households.
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The chart suggests that monetary expansion reinforces wealth concentration most strongly during periods of rapid liquidity acceleration rather than through steady growth alone. Sharp expansions, particularly during the COVID era, coincide with step-changes in top-end net worth, indicating that asset price inflation is the dominant transmission channel of monetary policy. In contrast, gains at the lower end are slower, smoother, and less responsive to liquidity shocks, reflecting reliance on income and transfers rather than asset revaluation. Notably, subsequent contractions in M2 do little to reverse the resulting wealth gap, implying that these effects are persistent and path-dependent. Taken together, the evidence supports the view that monetary policy systematically amplifies existing wealth asymmetries by disproportionately benefiting those already positioned in financial assets, especially during crisis-driven easing cycles.
Richard Cantillon identified a core dynamic of monetary systems decades before the French Revolution: when new money enters the economy unevenly, it systematically benefits those closest to the source of money creation. Over time, this mechanism compounds, particularly in asset-heavy economies, leading to an increasing concentration of wealth among those with early access to financial assets.
By the late 18th century, France had become an extreme case. Historical estimates suggest that the top 1 percent controlled roughly 60 percent of private wealth, while the top 10 percent held between 80 and 90 percent. The broader population faced rising living costs and stagnant incomes, widening the gap between asset owners and the rest of society. This imbalance eroded political legitimacy. As inequality became entrenched and traditional adjustment mechanisms failed, fiscal strain and food shortages acted as triggers, accelerating a breakdown that was already in motion.
Today, while the context is very different, the underlying monetary dynamic is familiar. With the Federal Reserve ending quantitative tightening in Q4 2025 and the likelihood of renewed balance sheet expansion rising, financial asset ownership once again plays a central role in how monetary policy transmits through the economy. In this environment, assets positioned closest to monetary expansion tend to benefit first.
From this perspective, owning financial assets is not simply a portfolio choice but a structural consideration. As modern monetary regimes continue to rely on liquidity provision and asset market support, exposure to assets within that transmission channel, increasingly including Bitcoin, becomes a defining feature of long-term capital preservation and participation.
