Closest to the Source

The measure that moves

We treat money as a neutral measuring stick. A Euro is a Euro, a Dollar is a Dollar, and the number on the price tag simply tells us what something costs. That picture is comforting, and for most everyday purposes it holds.

It stops holding the moment new money is created. Money does not appear everywhere at once. It enters the economy at a specific point, in specific hands, and it spreads outward from there over time. Someone always receives it first. Someone always receives it last.

This essay is about a single question that sounds almost too simple to matter. Does it make a difference who gets the new money first? The answer, worked out nearly three centuries ago and confirmed by the data ever since, is that it makes an enormous difference. And it is the difference that Bitcoin was designed to remove.

An Irish banker in Paris

The man who first described the mechanism was Richard Cantillon, an Irish banker who made a fortune in Paris in the early 1700s. His one surviving work, the Essay on the Nature of Commerce in General, circulated in manuscript and was published in 1755, more than two decades after his death. Economists still read it, because Cantillon saw something that the neat picture of neutral money misses.

Cantillon studied what happened when new gold and silver entered a country from the mines. In his day, precious metal was money, and fresh supply did not fall evenly from the sky. It arrived through a chain.

The mine owner was enriched first. He paid his workers, his suppliers, and the merchants around the mine, and he paid them at the prices that existed before the new metal had done any work. Those people spent in turn, and prices in their part of the economy began to rise. The new money rippled outward, hand to hand, lifting prices as it went.

By the time the metal reached people far from the mine, prices had already climbed. They faced a higher cost of living, but the new money had not yet reached their pockets, and when it did, it bought less. Cantillon's insight was that the same quantity of new money makes the early receiver richer and the late receiver poorer, purely because of when it arrives. Money, he showed, is not neutral in the short run. The order matters.

The Austrian School later gave this a name. Modern economists call it the Cantillon effect. After the money supply expands, individual prices do not rise together and in the same proportion, but at different times and by different amounts. The people who sell into the rising prices before their own costs catch up are the winners. The people whose costs and prices rise last are the losers. The gain of the first flows, in real terms, from the loss of the last.

The champagne tower

There is a familiar image that makes the mechanism easy to hold in mind. Picture a tower of champagne glasses, stacked in tiers, with a single glass at the top. You pour into the top glass, and only when it overflows does anything reach the tier below, and only when those glasses overflow does the next tier begin to fill.

The glass at the top is always full first, and always fullest. The champagne reaches the bottom row last, slowed at every level, and by then much has been drunk or spilled along the way. Nobody at the top has to take anything from the bottom for the bottom to end up with less. The structure of the pour decides the outcome.

That is the Cantillon effect as a picture. The question that decides everything is simple. Where is your glass in the tower?

Where the money enters today

We no longer mine our money. Today new money is created mostly in two ways. Commercial banks create it when they extend credit, and the central bank creates it when it buys assets such as government bonds. In both cases the fresh money enters at the top of the financial system, near banks, large borrowers, and the state.

Follow one unit of it through the economy. Suppose a large manufacturer, a carmaker, secures a loan of one billion Euros or Dollars in newly created credit. On the day the loan lands, nothing about prices has changed yet. The carmaker holds new money while the rest of the economy is still working with yesterday's prices. That is the strongest position in the whole chain.

The carmaker spends. It buys machines, it pays engineers, it funds new technology, all at prices set before this money existed. The sellers of those machines and the engineers who are paid now hold the money, and they spend it in turn. Nothing yet feels out of place. The effect is real but still invisible.

Now the engineer takes her wages and buys bread on the way home. The money reaches the baker. The baker, seeing steady demand, orders more flour, and the money reaches the miller, then the farmer who grew the grain. At each step the money has been in circulation a little longer, and at each step slightly more money is chasing the same goods.

By the time it reaches the farmer at the end of the chain, the general level of prices has edged up. The same nominal sum buys less than it did when the carmaker first held it. Every link received the same number of units, but each later link received units that were worth a little less in real purchasing power. The head start was worth real money, and it belonged entirely to whoever stood closest to the source.

And notice who is not in the chain at all. The saver who simply held Euros or Dollars in a bank account was never handed any of the new money. Yet the saver pays the higher prices all the same. The wage earner whose salary adjusts late, and by less than prices rose, is in the same position. These are the people at the bottom of the tower. They did nothing wrong. They were simply far from the pour.

The discount that never arrives

There is a second loss here, quieter than the first, and it is the one that should sting most.

In an economy that keeps getting more productive, prices should fall over time. Better machines, better methods, and better technology mean the same work produces more goods for less. The baker and the farmer both get better equipment every decade. Left alone, a loaf of bread should slowly get cheaper, year after year, and your saved money should buy more of it simply because you held on.

That falling price is the natural dividend of human progress, and it belongs to everyone, including the person who does nothing but save. Steady money creation hides this dividend. Prices that should have drifted down are pushed up instead, and the two effects roughly cancel, so the shelves look stable while the underlying gift disappears. The investor and analyst Lyn Alden describes this as inflation measured from a negative baseline, not from zero, but from the lower prices we should have enjoyed.

This is the deepest part of the injustice, and it is worth stating precisely, because it is easy to overstate. The saver is not robbed at the checkout in any dramatic way. The saver is quietly denied a discount that progress had already earned. We looked at the time dimension of this problem in an earlier essay, the medicine that feeds the disease, which examined how monetary policy delays economic pain rather than curing it. The Cantillon effect is the other axis of the same machine. That essay asked when the bill comes due. This one asks who pays it.

The honest case for the pour

It would be easy, and wrong, to stop here and cast the people near the source as villains and the system as simple theft. Before we reach any verdict, the strongest version of the opposing case deserves a fair hearing, because it is a serious one.

Central banks do not expand money in order to enrich the powerful. They do it to fight mass unemployment and to stop a collapsing economy from spiralling into a depression. When credit freezes and prices threaten to fall in a destructive way, a central bank can act as the lender of last resort, and that backstop has prevented real catastrophes.

The uncomfortable truth for critics is that the transmission runs through asset prices by design, not by accident. When Ben Bernanke defended a second round of large asset purchases in a 2010 newspaper article, he said plainly that easier conditions would lift stock prices, that higher stock prices would raise household wealth and confidence, and that the added confidence would encourage spending, which would support jobs and incomes. The rise in asset prices was not a guilty secret. It was the stated goal, because it was the lever that policymakers believed would reach employment.

On this view, the distributional side effect is exactly that, a side effect. The people it aims to help are the ones who would suffer most in the alternative, because the poorest are hit hardest by unemployment in a depression. The Bank of England, reviewing its own asset purchases, acknowledged that they had raised the value of assets held mostly by wealthier households, and argued that the counterfactual, doing nothing, would have been worse for everyone, including those with no assets at all.

There is even honest evidence that the link between money creation and consumer prices is looser than the simplest story suggests. Between 2009 and 2019 the Federal Reserve expanded its balance sheet enormously, and consumer price inflation stayed stubbornly below its target. Bernanke himself noted that the earlier asset purchases had little effect on broad money in circulation and did not produce high inflation. Anyone who claims that new money mechanically and immediately raises the cost of living has to explain that decade.

This is the case at its strongest. It is not a straw man. It is the reason serious, well-intentioned people defend the system, and it has genuine crises on its side of the ledger.

What good intentions do not change

The Austrian answer is not to deny any of that. It is to point out that the intention behind the pour does not change the shape of the tower.

A carmaker's loan may fund a genuinely useful factory. The lender of last resort may prevent a genuine panic. None of that alters the mechanical fact Cantillon described. The money still enters at a point, still spreads unevenly, and still rewards proximity to the source over distance from it. A side effect that recurs every cycle, for decades, is not a footnote. It compounds.

And the data show it compounding. The Federal Reserve's own Distributional Financial Accounts track how American wealth is split. In 1989 the wealthiest one percent of households held around 23 percent of all wealth. By 2024 their share had risen to roughly 30 percent. Over the same period the share held by the bottom half of households drifted down toward about two and a half percent. Wealth is held disproportionately in exactly the assets, equities and real estate, that new credit reaches first.

The 2020 pandemic response made the pattern vivid. From February 2020 to April 2022 the United States M2 money supply grew by roughly 41 percent, from about 15.4 trillion to 21.8 trillion US Dollars, the fastest expansion in the modern record. Consumer prices followed with a lag, peaking near nine percent in the middle of 2022, well after asset prices had already surged. In January 2022, Oxfam reported that the ten richest men in the world had more than doubled their combined wealth during the first two years of the pandemic, from about 700 billion to 1.5 trillion US Dollars. That figure is a headline estimate built from billionaire asset values, and it has been criticised on methodology, so it is best read as an illustration rather than a precise measure. But the direction it points is the same direction the Fed's own accounts point.

There is a popular claim that all of this can be pinned on a single date, the fifteenth of August 1971, when President Nixon suspended the Dollar's convertibility into gold and cut the last link between the currency and metal. Charts circulate showing wages and asset prices diverging from around that year. It is worth being careful here. The suspension was real and important, and the divergence in the data is real too. But a chart that lines up with 1971 does not prove that 1971 caused it. Globalisation, technology, tax policy, and the decline of unions all pushed in the same direction over the same decades. The honest position is that the end of gold convertibility removed the last hard limit on money creation, which let the Cantillon machine run without a brake, while other forces pushed alongside it. Correlation is a clue, not a verdict.

The Modern Monetary school offers the mirror image of the Austrian view. It argues that a government issuing its own currency can spend freely, and that money creation and inflation are largely decoupled. The premise underneath it, stated or not, is that the state can allocate resources better than the people whose savings are being diluted to fund the spending. That is a claim you either accept or you do not. If you do not, the Cantillon effect remains exactly what it looks like, a quiet, structural transfer from those far from the source to those near it.

Money with no top glass

This is where Bitcoin enters, and it enters as a mechanism, not as a recommendation.

Bitcoin's supply is fixed at 21 million units and is released on a schedule that no one can alter. New coins are issued to miners as a reward for adding blocks to the ledger. That reward began at 50 Bitcoin per block in 2009 and is cut in half roughly every four years. It fell to 25, then to 12.5, then to 6.25, and after the most recent halving in April 2024 it stands at 3.125 Bitcoin per block. Issuance shrinks step by step until the last fraction of a coin is mined around the year 2140.

The point that matters for this essay is structural. There is no top glass in Bitcoin. No central bank, no government, and no bank can create new units at will and spend them first at yesterday's prices. The privileged injection point that drives the Cantillon effect simply does not exist, because the issuance schedule is written into the rules and applies identically to everyone.

New coins do still enter through miners, but miners do not receive them for free. They spend real resources to earn them, chiefly electricity and specialised hardware, and to cover those ongoing costs most miners must sell a large share of what they mine on the open market. That new supply reaches buyers at the prevailing market price, not as a discount handed to insiders. And because the reward keeps halving, the amount of new Bitcoin created each year, measured against the total that already exists, keeps falling toward zero. The stream that could concentrate is drying up by design.

Bitcoin also gains strength from something the issuance rules alone do not capture, and that is the network effect. Each additional holder, exchange, and custodian makes the network more liquid and harder to displace, in the same way that a language becomes more useful the more people speak it. Over more than fifteen years Bitcoin has moved from an experiment to an asset that established financial institutions now build products around, including the large asset managers behind recent exchange-traded funds. That is a sign of maturing infrastructure and of serious capital treating the network as durable rather than a passing curiosity. It is not a promise about price, and it does not erase the early advantage described next. It simply means the fixed-supply system is no longer confined to the fringe.

The honest case against Bitcoin's fairness

Here too the strongest objection has to be met head on, because a comfortable version of this story would be false.

Bitcoin's ownership is quite concentrated today. The earliest participants, including its pseudonymous creator, acquired coins when almost no one was competing for them. Satoshi Nakamoto alone is estimated to hold around 1.1 million Bitcoin, mined in the first year and never moved. Early miners earned 50 coins per block against trivial difficulty. That early advantage is real, and no honest account should wave it away. Buying a scarce asset early and cheaply is a windfall, whoever does it.

The on-chain statistics that circulate also mislead in a specific way. Headlines that say a tiny fraction of addresses hold most of the coins are counting addresses, not people. Many of the largest addresses are the cold wallets of exchanges, which custody coins on behalf of millions of individual users, so a single address can represent an entire crowd. When analysts adjust for this, grouping addresses into the entities that actually control them, the picture is less concentrated than the raw address counts suggest, and over some periods supply has moved from larger holders toward smaller ones. But this is contested territory. Whether Bitcoin's distribution genuinely improves over time is an empirical question that is hard to settle, and anyone who states it as a certainty is overreaching.

So the honest claim is narrower, and it is stronger for being narrow. Bitcoin's advantage is not that it is perfectly distributed today, because it is not. Its advantage is that it has no lever for the classic Cantillon transfer. In the existing system, a small number of actors can create new money and spend it before anyone else feels the effect, and they can do it again and again. In Bitcoin, no one can. The rules that govern the first coin govern the last, and they are the same for a miner in a data centre and for a person buying a few Euros or Dollars worth on a phone. The early advantage was a one-time event. A privileged pour is a permanent feature, and only one of these systems has abolished it.

The question that remains

Cantillon watched new gold ripple out from the mines and saw that proximity to the source quietly decides who gains and who waits. Almost three centuries later, the mechanism is unchanged, only the mine has moved. It sits now at the top of the financial system, where credit is created, and the champagne still reaches the bottom row last.

There is no instruction here, and no forecast. The purpose of an essay like this is to make a hidden mechanism visible, so that the reader can weigh it. The mainstream defends the pour because it fears the alternative, and that fear has real history behind it. The Austrian tradition answers that a remedy which redistributes toward the source every cycle, for generations, is its own kind of harm.

Between those views sits a question worth carrying. Which system applies the same rules to everyone? In one, the glass at the top is always filled first. In the other, there is no top glass at all.