Cantillon was an intriguing character. An Irishman with a Spanish name, he spent most of his adult life in France, in the company (it was said) of the notorious John Law. Law was a Scot who at a time was the de facto Finance Minister of France.

The French economy was going through a depression. Law convinced King Louis XV and his guardian the Duke of Orleans, to let him open a bank and issue paper currency. The paper would be backed by gold and silver mined from France’s huge colony in North America, along the Mississippi River.

The colony stretched for 3,000 miles (4,800 km), and was far larger than France itself. It covered eight current US states that hug the river: Louisiana, Mississippi, Arkansas, Missouri, Illinois, Iowa, Wisconsin, and Minnesota. Rumours were rife in France of the immense treasure that were being unearthed there. Demand for Law’s paper currency soared. Paper money, a novelty, started to circulate around in France in ever greater volume. Property prices, especially those in and around Paris, shot through the roof. So were the share prices of the Mississippi Company, created by Law to exploit the new world Everyone was feeling good and optimistic about the future. Law was hailed as a genius—until one day the French people found out the rosy picture in North America was more fiction than fact. The massive buying turned into an even more massive selling. Prices plunged, a financial crisis gripped France and a large part of Europe. Law was chased out of France. He died a poor man in Venice. This is the famous Mississippi Bubble, the first of the many bubbles in business history.

Law may have suffered from the bubble, his friend Cantillon, on the other hand, benefited hugely from it. Leveraging on his friendship with Law, Cantillon speculated on property prices and got out before the bubble burst. He walked away with 20 million livres ($400 million in today’s money). He then moved back to England and bought a house in London. Years later he died in a fire in his London home, allegedly set by his cook whom he had discharged.

Today Cantillon is recognised as the first great western economics theorist. His entire reputation rests on just one treatise called “Essai Sur la Nature du Commerce en Général”, (“Essay on the Nature of Commerce in General”) which he wrote in France in 1732. It was published anonymously in England 20 years after he had perished in the fire.

Drawing on his experience with the Mississippi Bubble, Cantillon showed that changes in the supply of money would change prices. More money flowing into a system would cause economic expansion and push prices up. But ultimately the process will reverse itself as rising prices will lead to higher imports, which will then drain money out of the system and cause prices to fall.

Moreover, he showed that, during inflation, prices do not rise uniformly. How much prices would go up for certain assets depends on the spending habits of the people who benefited from the increase in money supply and the channels through which the money flows. Human psychology thus plays as much a part in asset inflation as hard money.

This may sound like Economics 101, but Cantillon was the first person to draw a definite connection between money supply and prices. He was also the first to warn consumers of the perils of business cycles—a warning that continues to fall on deaf ears today when prices are on the rise and optimism overrules caution. Cantillon, if he were still alive, would be amused.