Is Long-Term Money Neutral? The Cantillon Effect and Monetary Expansion Debate

Long-Term Money Neutrality: A Myth Debunked by Monetary Expansion

The idea that doubling the money supply only doubles prices without affecting the real economy is, for most debate participants, a massive delusion. Associated with Hume and Friedman, this concept posits that money is neutral in the long run: nominal prices adjust, wages adapt, and real production, employment, and growth remain unchanged. Under this view, monetary policy would be inert regarding economic activity. However, recent decades of monetary expansion have been accompanied by asset bubbles, bailouts, and sustained increases in wealth inequality. The question is not trivial: if money were truly neutral, why do central banks persist in issuing currency and executing bailouts?

The Cantillon Effect: First Receivers Win

The most cited refutation is the Cantillon Effect, which participants note was already observed by the School of Salamanca classics. New money does not reach everyone equally or simultaneously. It enters first the hands of financial institutions, large corporations, and well-connected agents, who purchase assets and goods at old prices. By the time money filters down to wage earners and small savers, prices have already risen. The result is a wealth transfer from late recipients to early ones. This is not a system failure: it is the system.

The very existence of monetary expansion refutes neutrality, according to this reasoning. If money were neutral, no one would have an incentive to issue it, as no one would benefit from the asymmetries it generates. Those controlling issuance gain a structural advantage. Hence, some argue that monetary policy is not a technical tool but a mechanism of disguised redistribution.

Asset Bubbles and the Hot Potato of Fiat Money

Credit expansion does not translate into a proportional increase in consumer prices, but rather into bubbles in financial and real estate assets, according to this analysis. Those holding fiat currency seek to get rid of it by buying things they know others will demand. It is the hot potato: cash loses value, while real assets retain it. This behavior, rational at the individual level, is destabilizing at the aggregate level. Prices expressed in central bank currency can only rise, never tend toward equilibrium.

Globalization has masked part of this effect, as noted in the debate. Producing where energy is cheaper, subsidizing sectors, or shifting inflation into wages via internal devaluation are mechanisms that delay the bill. But they do not eliminate it. When the adjustment comes, it arrives all at once.

The Demonetization of Silver: A Financial Coup

History offers a paradigmatic case: the demonetization of silver in the 19th century. Far from being a natural process, some analyses describe it as a financial coup orchestrated by an organized minority demanding only gold as war reparations after the Franco-Prussian War. This movement, barely mentioned in history books, caused one of the largest wealth transfers to that minority and allowed them to monopolize credit by granting loans without real gold backing. Money neutrality, in that episode, was conspicuously absent.

Money as a Weapon of War and the Energy Value Theory

Some go further, arguing that money is a weapon of war, leaving little room for neutrality. From the energy value theory, money's value is linked to the availability and cost of energy. If energy becomes expensive, money loses real purchasing power. The relationship between wheat and gold, or between hours of work and gold, does not remain stable in the long run. Neutrality would, at best, be a textbook approximation.

Fiscal policy adds another layer, as noted in the debate. VAT, income tax, property tax, municipal capital gains, self-employment contributions, and various licenses create imbalances unrelated to the money supply. Monetary neutrality, in a complex regulatory environment, is an analytical fiction.

Why Is Money Neutrality Still Defended?

The persistence of this concept has a practical explanation, according to some participants: it justifies central bank intervention as something technical and neutral. If money were neutral in the long run, monetary policy decisions would have no redistributive effects. But empirical evidence shows the opposite, according to this analysis. Wages rise only as much as central bank intervention rates dictate, and little else. This is what drives the real economy on the ground since 1973, claims one participant.

Current hyperindebtedness adds another layer. Central banks do not want to raise wages because then citizens would be freed from the burden of debt, according to this interpretation. Money neutrality, in this context, is not a scientific hypothesis: it is an alibi.

The Long Run: An Indeterminate Horizon

The neutrality argument hides behind the long run. But no one can define when that long run arrives or what equilibrium would be reached, as noted in the debate. It is an indeterminate horizon used to avoid accountability in the short term. Meanwhile, monetary expansion continues to create winners and losers. Money neutrality, as of this discussion, remains an unconfirmed hypothesis. And with each bursting bubble, the gap between the narrative and the data widens.