The Philosophy of Money (2010)

Book Review from the March 2010 issue of the Socialist Standard

Money by Eric Lonergan. Acumen, 2009

This is an unusual book, written by a hedge fund manager. It verges between conventional orthodoxy and the highly unorthodox. In many respects it is as much a book about philosophy, thinking and perception as it is about economics, and not unlike recent works by George Soros in that respect.

Lonergan has read Marx, Hayek and many of the key financial analysts of the contemporary era, from Markowitz to Shiller. He has provided a synthesis of their views about markets and money, underpinned by his philosophical readings from his earlier academic studies. These at times border on the insightful but ultimately disappoint.

His discussion of inflation is an obvious case in point. As early as the first chapter he writes:

‘Many people believe that their money is stored in a safe at the bank, if they think about it at all. Ignorantly, we think of a deposit with a bank as money; indeed, in most of economics deposits are referred to as “money”, and are categorized as such in official statistics, which is misleading. Deposits are not money: they are loans we make to banks’ (pp.11-12).

This is quite true and one of the reasons ‘credit creation’ ideas still peddled by some economists are erroneous, along with theories which try to explain rising prices with reference to the expansion of bank deposits. However, he also says:

‘…the solution to a banking panic is effortless and disconcerting: a central bank merely needs to say that it will create as much money as is needed, and provide this to the banks, and everyone should calm down’(p.12).

Later, he writes of ‘an irrational fear of inflation’ (p.133), but these fears are not necessarily irrational. This magazine has chronicled for decades how an excess issue of inconvertible paper currency (beyond that needed for production and trade) leads to an artificial bloating of monetary demand known as inflation. This has been a consistent phenomenon since the late 1930s/early 1940s and in some periods, such as at times in the 1970s, has been quite significant.

At present, the extent to which a tactic like ‘quantitative easing’ can lead to cost price bubbles and can lead to an excess note issue will be the extent to which underlying inflationary pressures will re-emerge with a vengeance within the capitalist economy. Lonergan clearly missed the relevant chapters in Marx’s Capital where the inflationary process – and the explanation for it – is discussed, or has at least failed to apply it to the contemporary situation. It would certainly help explain to him why inflation is a monetary phenomenon created by governments through central banks which cannot, of itself, solve any of the other economic problems endemic to capitalism.

DAP