Although today high levels of inequality in the United States remain a pressing concern for a large swath of the population, monetary policy and credit expansion are rarely mentioned as a likely source of rising wealth and income inequality. Focusing almost exclusively on consumer price inflation, many economists have overlooked the redistributive effects of money creation through other channels. One of these channels is asset price inflation and the growth of the financial sector.
The rise in income inequality over the past 30 years has to a significant extent been the product of monetary policies fueling a series of asset price bubbles. Whenever the market booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble.
The Cantillon Effect
The redistributive effects of money creation were called Cantillon effects by Mark Blaug after the Franco-Irish economist Richard Cantillon who experienced the effect of inflation under the paper money system of John Law at the beginning of the 18th century.1 Cantillon explained that the first ones to receive the newly created money see their incomes rise whereas the last ones to receive the newly created money see their purchasing power decline as consumer price inflation comes about.
Following Cantillon and contrary to Fisher and other monetary theorists of his time, Ludwig von Mises was the first to emphasize these Cantillon effects in terms of marginal utility analysis. With an increase in the stock of money, the cash balances of the early receivers of the newly created money increase. Correspondingly, the marginal utility they give to money decreases and the individuals in question buy either investment or consumption goods, thus bidding up the prices of those goods and increasing the cash balances of their sellers. With this step by step process, the price of goods will increase only progressively and affect both the distribution of income and wealth as well as the different price ratios.
