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The Austrians Saw It Coming

What a century-old school of economics predicted about the pandemic state — and why its vocabulary still fits the record better than anything in mainstream discourse

The Cantillon Effect, Applied

In the early eighteenth century, the Irish-French economist Richard Cantillon observed that newly created money does not enter the economy uniformly. It enters at specific points and flows outward in predictable patterns, benefiting those nearest the point of injection first and most, and those farthest from it last and least. The phenomenon now bears his name. Mises developed it in his analysis of credit expansion. Hayek built it into his business cycle theory. Rothbard pressed it as the central indictment of central banking.

The Cantillon effect is the theoretical name for what the monetary record of 2020 shows. The Federal Reserve’s emergency facilities that year, which expanded the central bank’s balance sheet by approximately $4.5 trillion, did not distribute the new money uniformly across the American population. The money entered through specific channels — the corporate bond markets, the Treasury securities markets, and the financial sector — and flowed outward to the holders of assets nearest those channels.

The result was the largest upward transfer of wealth in modern American history, not as an accident but as the predictable way newly created money moves through an economy. The Austrian framework saw this coming three centuries before it happened.