ABSTRACT

This chapter analyzes the credit expansion and the Cantillon effect resulting from it, as the increase in the supply of loans is by far the most important channel through which new money is introduced into the economy in modern times. Richard Cantillon mentioned credit expansion, but he did not analyze it in detail. The chapter extends, thus, the insights of the Irish economist by examining the first-round effect of credit expansion. It finds that credit expansion relatively supports net borrowers, the financial sector and the public sector, and causes boom and bust cycle, in line with the Austrian Business Cycles Theory. The chapter is a kind of introduction to the considerations developed further in the following chapters, such as the international aspects of the Cantillon effect resulting from credit expansion, its impact on the so-called secondary features of the business cycle, price bubbles, and an increase in income and wealth inequality in OECD countries over the past several decades.