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Cantillon effects in Africa

Here's my small contribution to what J.P. Koning calls "The great monetary injection debate of 2012." (See also George Selgin's post two below.) It's a third-hand anecdote told to me by Larry White, who heard it from an African economist when Larry was chairing a conference whose proceedings were published as the book African Finance: Research and Reform.

The African economist told Larry, "Here's how the money supply increases in my country. The president orders the central bank to send an armored truck full of cash to his house. The president's wife goes into town and pays for her shopping spree with cash from the truck."

I doubt that these increases in the money supply were announced in advance or easily anticipated.


  1. What supposedly happens in this, unamed, African country sounds a lot more straightforward what happens in the United States, United Kingdom, Euro Zone…. (and on and on).

    And if the money supply is increased just to satisfy the greed of one family (rather than the greed of thousands of people in the financial industry and dependent enterprises), most likely less damaging than what happens round here also.

  2. Of course those injections were anticipated. If you live in a country like that you know they are coming, you just don't know where or when. So sometimes people will underestimate the injection and keep prices too low for awhile, and other times they will overestimate the injection and keep prices too high for awhile. It's just like any western country, but with more uncertainty.

    Oh, and in the rare instances where the government's net worth is high enough to cover the new cash, the injection will cause no inflation, and no Cantillon effects.

    1. To my mind, that has about as much practical value as saying that another recession is coming, we just don't know where or when. In a post that I hope to do before the end of the year I will briefly discuss my own thoughts about the backing theory you have advocated in many comments here and elsewhere.

      1. I'll be lurking out in blogland, waiting for your post. The backing theory (aka real bills doctrine) was developed by practical bankers over centuries of experience. It deserves a great deal of serious thought. Academic economists, true to form, have so far only given it the back of their hand.

        1. I read your comments on Mr. Selgin's post and saw where your confusion lies, so please allow me to put an end to it: You asked if a currency is truly fiat, then why does its issuing central bank still need to keep assets on its balance sheet (as if for backing it). The plain answer is that it doesn't need to:

          The accumulation of assets does not constitute a target of any healthy central bank, but a mere consequence of achieving its true set of targets. For instance, the Peruvian central bank (BCRP) had -by the end of October- over $62 billion in Net International Reserves (i.e. stock of foreign currency), which is about one third of Peru's GDP. Non-economists have publicly claimed that so much backing is unnecessary and that more useful things could be done with that money (like fighting poverty etc.). Nevertheless, just today, the BCRP bought $80 million more.

          "Why?", you may ask. Well, simply because backing is not what the BCRP is targeting but the stabilization of the exchange rate. Given the depreciation of the U.S. dollar, the BCRP must intervene in the FOREX market by buying dollars with soles -the Peruvian currency- to counteract this trend, thus smoothing the path to the new exchange rate level (this is called a "dirty float").

          As you can see, building up backing assets is -to most central banks at least- but an involuntary aftermath of carrying out the monetary mechanisms necessary to fulfill their actual policy targets.

          1. I've been confused about the real bills doctrine since 1976, and I expect to remain confused long after you despair of educating me.

  3. Agree with Mr. Schuler, not knowing where or when an injection will happen qualifies as an "un-anticipated" one. Moreover, an "anticipated injection" should be narrowly defined as one whose "time, location and -let me add- magnitude are perfectly known".

    With this definition in mind, the so-called "great monetary injection debate of 2012" of whether or not "Cantillion effects" exist (defined as the extra-gain that the first receivers of the extra-money get by being able to spend it before the prices are adjusted to the new amount of money) is reduced to whether or not the injection is fully anticipated or not:

    If it is, then rational expectations impede Cantillion effects; if it isn't, then Cantillion effects do happen. Now, whether or not the money injection will cause inflation is easily explained with Fischer's equation of exchange that Mr. Sproul has long dismissed, so an additional post explaining why backing has nothing to do with it is quite un-necessary.

  4. I would classify Central Bank "assets" as almost as fictional as Social Security "trust fund" assets.

    True Central Banks own a bit of gold and so on (although whether they even have as much of this as they claim is contested) – but most of their "asset" are just government I.O.Us and other such.

    And, as Mr Moya points out, Central Banks do not even need to have this.

    In reality Central Banks create money from NOTHING – and then they lend it out to bankers (and other such) in various complex ways. Then, indirectly, this money is lent back to the government to finance its deficit spending.

    The whole process is a vast scam.

    It is "legal" for the Legal Positivist reason that government courts declare that anything governments (or government approved) authorities officially do (under Statute) is legal – by definition.

    However, economic law is rather less flexible than government law – so the whole scam will collapse.

    "There is no such thing as economic law – we can fight poverty, by spending money we create from nothing, and do anything else we like".

    This seems to be the unspoken assumption of modern governments (and establishment "economists").

    They (and the rest of us) will find that Carl Menger was right and the German Historical School was wrong, in the "War of Method" – economic law DOES exist (and it trumps government laws).

    I would like the think that the old Schoolmen (what Thomas Hobbes sneered at as the "Kingdom of Darkness") are somewhere smileing.

  5. Mr. Marks, at first I thought your view of central banks was exaggerated, but now I see your point: Peru's central bank (BCRP) has a purchase limit of treasuries up to 5% of the preceding year's monetary base, precisely so that it cannot exceed the financing of government expenditures. I thought other central banks had similar regulations (I still think most do), but I just realized that at least the Federal Reserve does not: According to this Joshua Zumbrun's article (, the Fed owns $1.65 trillion of Treasury securities and -according to the CIA World Factbook- last year's stock of narrow money was 2.01 trillion. That's 82%, more than 16 times the BCRP's purchase limit! No wonder U.S. Treasuries still sell at such low interest rate despite the amount of outstanding debt as a percentage of GDP, because the Fed is artificially creating a demand for what otherwise would be deemed as junk bonds…
    Anyways, Merry Christmas and a Happy New Year to everyone at the Free Banking blog, I will start working at the Peruvian equivalent of the FDIC since January 2013, so I may not continue participating as often as I did this 2012, but please carry on with the debate.

  6. Gonzalo R. Moya V.

    Sir – even when Central Banks have legal rules, they break them.

    The (unlawful) antics of the European Union Central Bank are an example of such conduct.

    Although, yes, the deeds of the Federal Reserve system people are vile – even by the standards of Central Bank folk.

    The American right are called all sorts of nasty names (of which "paranoid" is the most mild) for their hatred of the Federal Reserve system – but the hatred is well founded.

    There is a Italian saying…..

    "He who puts his trust in the people, builds his house upon sand".

    That may be true – but I would reply…..

    "He who puts his trust in the elite (including the Central Bank elite), builds his house upon quick-sand".

    I hope you had a Merry Christmas – and I hope that you and your family have a Bearable New Year.

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