This essay strives to explain the Cantillon Effect and how the natural unfairness of all previous monies have always created a world in which the privileged few could take advantage of the unprivileged many. We explore how bitcoin, as the world’s most fair money, alleviates the prevalence of the Cantillon Effect and creates a fairer, more equitable and prosperous world for all.
What Is The Cantillon Effect?
“The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. The first recipient of the new supply of money is in the convenient position of being able to spend extra dollars before prices have increased. But whoever is last in line receives his share of new dollars after prices have increased.”
Nicolás Cachanosky, American Institute For Economic Research (AIER)
We saw the Cantillon Effect in 2008 and 2020 when banks and other companies were given bailouts to avoid bankruptcy. These are practical case studies that demonstrate the effectiveness of having direct connections to Wall Street and the Federal Reserve. Only those closest to the individuals controlling the money supply were able to greatly benefit from each recession, while many in the middle and lower classes did not.
Today, this can be easily observed in the recent stimulus package being debated in the United States. While senators squabbled for months over the amount of money citizens would receive, there is nothing but bipartisan, silent consensus on the billions of dollars in fresh money going to support massive organizations and interests outside of the direct stated purposes of the bill.
The Cantillon Effect runs the world.
Money Has Never Been Fair
Non-neutrality of money means that money is not created and distributed among a population evenly or fairly. There is an inherent unfairness to money creation and the easier the money is to create, the more unfair it is for those without authority and access to certain connections.
To put it frankly, getting ahead in life can be catalyzed by getting closer to the money printer. When people talk about institutionalization, what they are really referring to are the rules for getting closer to the money printer today.
To the untrained eye, America looks like the land of prosperity, but once the blinders have been lifted, reality shows that it is just the land closest to the money printer.
If you zoom out even more, it becomes clear that everyone living in the U.S., and receiving U.S. dollars directly, is inherently living in a privileged position compared to anyone else in a similar position, but not receiving USD directly. This scales up toward the elites, who are truly close to the printer, and down to the poor.
The Cantillon Effect is not just true for fiat but it is also true for precious metals as well.
Precious metals (mainly gold and silver) historically have been the best available monetary goods humanity could harness. Unfortunately, the mining, custody and validation processes needed for a properly-running precious metals economy created weakness for opportunistic central operators to benefit from a privileged position.
The Spanish Price Revolution caused by the mining of newfound gold and silver in America wreaked havoc across Europe and arguably ended the unprecedented growth of the Renaissance. Spanish royalty reaped the benefits from the new found specie while people across Europe found the buying power of their gold and silver eroding.
History is riddled with cases of debasements, coin clipping and other violations of the fairness of a precious metal system. Ultimately, the failures of precious metals in scaling to a digital global world, as well as the inability to defend against centralization, confiscation and newfound supply, has led to the introduction of the far more unfair fiat monetary systems that we live with today.
On January 3, 2009, Satoshi Nakomoto mined the very first block of the Bitcoin blockchain with the message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” — the headline from The Times newspaper of London that morning. This was not only a message from Nakamoto about their intentions to create a more fair money, but it effectively timestamped and proved the fair launch of the bitcoin currency.
Because of Nakamoto’s deliberate actions and Bitcoin’s permissionless, free and open-source nature, bitcoin is the first truly neutral money. Bitcoin eliminates the inherent unfairness that comes with all previous monies as well as any need to trust a third party in order to use Bitcoin.
Bitcoin Aligns Incentives
The Cantillon Effect 2.0 is introduced to the world by Bitcoin. In a Bitcoin world, rather than being rewarded for privilege, status and geography, only those living closer to the truth can reap the fruits of value creation.
“The only way to get bitcoin is to acquire it from someone else, you pretty much cannot steal bitcoin, you have to provide something of value and someone else has to willingly part with their bitcoin. I think the profundity of that cannot be overstated. There is no other way to extract value from the global markets than to be productive and I think this is an enormous change for society”
Gigi, Engineer at Swan Bitcoin (Bitcoin’s Nature, “Bitcoin Magazine Podcast”).
The transition towards a Bitcoin Standard is an awakening of truth and reality.
Bitcoin eliminates the ability for institutions to go against the market because one cannot create bitcoin out of thin air without an exorbitant amount of energy to mine it. Creating more than 21 million bitcoin is impossible because the 21 million supply cap is enforced by a distributed network of independent nodes. For the first time in history, Bitcoin offers individuals a means for accurate economic calculation.
Bitcoin makes the use of violence to extract value much less scalable.
Because Bitcoin enables easy custody and validation of one’s bitcoin, Bitcoin users no longer need to rely on central institutions to hold their wealth. Because of this distribution of keys and the fact that there is no way to move coins without actually getting control of a Bitcoin private key (spend key), censors or thieves now must go from key holder to key holder and extort each individual key.
We are seeing technology shift the logic of violence on a fundamental level. Gone are the days that a government can simply freeze one’s bank account. This increased cost in the extortion and control of a population’s wealth is a fundamental shift in how the world is presently organized.
The defensibility bitcoin gives individuals and companies alike is discussed in depth in the recent Bitcoin Magazine article “The Sovereign Company Thesis.”
A Transparent Future Allows For More Opportunity
We are all very aware of what a closed and centralized monetary system leads to because we live through it every day. Centralization certainly has its use cases but not when there is a lack of accountability for the dilution of an individual’s labor. Creating money from nothing continues to plague a person’s productivity and ability to get ahead in life.
With Bitcoin, the accountability is placed on the individual rather than an institution or on self-appointed bureaucrats who are too far removed from the realities of most people’s situations. There are very few people who understand how money is created and how governors within Federal Reserve branches decide on “acceptable” inflation rates. How much is too much inflation versus how little is too little? Fiat becomes more akin to improv theater than actual science. Rules are broken when deemed necessary by those in power while citizens of nations have no say in what is best for their monetary interests.
In contrast, Bitcoin’s consensus rules are unchanging and its code is upgraded extremely slowly with world-class peer review. Unlike your iPhone, which breaks down if not upgraded, Bitcoin upgrades are optional and users opt-in on a volunteer basis. The Bitcoin network’s consensus is purer than democracy. It does not seek to take away from the productive in order to support the rent-seeking or parasitic. It continues to incentivize the best outcomes for all participants, especially when that means forcing individuals to be more productive in order to acquire more bitcoin.
In the last 12 years of Bitcoin’s existence, one would be hard pressed to find someone who has not yet heard of the digital currency. However, up until this point, it has taken an abnormal amount of curiosity to find out what money really is, how it is created, how it has been used throughout history and what successfully makes a currency or store of value versus what does not. Today, Bitcoin is the viral orange pill waking the world to what our current monetary system is and how it affects our daily lives.
In a Bitcoin-based world, rather than a world where benefits are unfairly accrued to those who have the right social positioning and leverage, value is accrued by those creating value; those who are closer to the truth.
Ultimately, Bitcoin enables individuals the ability to opt out and build outside of the existing constructs of control. These benefits are not experienced equally. The earlier an adopter is, the more they are rewarded, as it should be within a truly fair system. Bitcoin rewards the curious.
We all find Bitcoin at the time we deserve it most. There are those who held bitcoin really early but are no longer involved with the space. Some people have to travel the more excruciating journey of finding Bitcoin very early ,to only cash out of their position before huge value is unlocked — not just with Bitcoin’s price, but in unlocking the true potential of productive individuals who are not in the most ideal situations. Bitcoin changes that by being accessible to anyone with an internet connection. With the introduction of the internet and access to information, Bitcoin will play a similar role in continuing to expose the opaque practices of centralized banking networks.
A transparent future allows for more opportunity. What happens to the world when there is money that truly comes with no baked-in privilege?
Welcome to the Bitcoin Renaissance!
Special thanks to Gigi for the inspiration and thoughtful editing.
This is a guest post by Christian Keroles and Deniz Saat. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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