THE great Scottish philosopher David Hume said of money: ``'Tis the oil which renders the motion of the wheels more smooth and easy.''

But as time goes on, oil gets thinner, and becomes degraded ..... and it's just the same with money.

Many people who have spent their working lives making provision for their retirement are now living in genteel poverty because their savings have been eaten away by the relentless ravages of inflation, writes STUART PAUL.

However, there are others who've made inflation work for them, successfully wheeling and dealing in the financial markets, or selling property during the boom times. For them, negative equity is someone else's problem.

Today's reviewer, Professor David Simpson (right) is economic adviser to Standard Life. He was naturally keen to get to grips with a new book which argues the end of inflation and the dawn of the zero era.

ROGER BOOTLE has written a very enjoyable book* ..... knowing the rate at which prices will rise over the next five years is information with a high commercial value.

Financial marketeers would be able to make considerable sums of money if they could be absolutely certain inflation really was dead for the foreseeable future. Actuaries and others making asset allocation and bonus distributions would find their work much easier if they could be sure of the future rate of inflation.

Unfortunately - and despite the blurb and hype on the cover - the text of this book offers no such guarantees. While the author is extremely persuasive in convincing the reader that in the recent past the forces making for inflation have been in retreat throughout the western world, he puts forward no theory to explain inflation or its causes.

He cannot, therefore, convincingly argue for its imminent demise. He is more successful in his argument that we are in greater danger from governments putting interest rates up too far, and thus discouraging real economic activity, than we are at risk of further inflation.

While Bootle does not propound his own inflation theory, he has no difficulty in demolishing ``monetarism'' and other macro-economic nostrums, which he shows to be little more than a string of catchphrases for the chattering classes.

In the early eighties, it was widely believed that the rate of inflation was determined by the rate of growth of the money supply, assuming this to be a uniquely identifiable quantity under the complete control of the central bank of the country.

The main reason for the demise of this theory was the failure of attempts to put it into practice in the UK during that decade. In fact, there is no such thing as ``the quantity of money''. There is a spectrum of financial assets which possess the qualities of ``moneyness'' in different degrees.

In so far as anything corresponding to an aggregate quantity of money in a particular country at a particular time can be identified, its value would be determined as much by the borrowing and lending decisions of banks and private individuals as by decisions of the central bank.

The idea that a central bank can know what, at any moment, the aggregate money supply is, to say nothing of what it should be, is a pretence to knowledge which simply does not exist.

While making central banks independent of government diminishes the risk of political interference, it does not make the task of controlling inflation any easier.

Of course, central banks can influence the supply of money, however defined, and the terms on which it is offered. The trick is to know in which direction to exert that influence.

Fearing a recession following the Stock Exchange crash of October 1987, the then Chancellor of the Exchequer, Nigel Lawson, adopted a deliberately relaxed approach to monetary policy. This was applauded by informed opinion at the time as being statesmanlike.

With hindsight this decision was used to explain the origins of the inflation of prices in the period 1988-90.

Is inflation really dead? One of the dangers of writing about economic affairs is how quickly any pronouncement of a general character can be overtaken by events.

For example, in the mid-fifties, the eminent and experienced economist Sir Donald McDougall wrote a famous book entitled The Dollar Crisis to explain the post-war scarcity of dollars outside the US - believed at the time to be a chronic problem. Shortly after the book's publication the dollar shortage evaporated!

Likewise, Bootle claims that the steep fall in long-term interest rates in the US last year supports his contention that inflation in the western world has really disappeared for good. But in the first five months of 1996, the yield on the US long bond has risen to just under 7% amid a resurgence of inflationary fears in the bond markets.

Bootle puts forward the argument that the monetary authorities are so pre-occupied with the dangers of inflation that there is a serious risk that interest rates will be set too high so that either the rate of real economic growth will be choked off or, in the extreme case, a recession will be precipitated.

This is an argument which certainly needs to be considered seriously, but where the balance lies between the risks of inflation and deflation in any country at any moment is difficult to tell.

One possible solution is to abandon the state monopoly of money so as to allow the amount and terms of its availability to be wholly determined by market forces, an arrangement which worked successfully in the Scottish banking system in the early nineteenth century.

In other words, one should let the commercial banks make their own lending decisions, on the understanding that they will not be bailed out if they become insolvent.

This is perhaps too radical a solution for Bootle. He concludes that: ``All countries need some form of anchor for nominal values to keep the inflationary genie in his bottle.'' An interestingly mixed metaphor.

The fact that he is unwilling to commit himself to the particular form which that anchor should take illustrates the fundamental weakness of the book. While it is both entertaining and instructive to read, it lacks any theoretical basis.

So what will the future hold? Bootle is probably correct to suggest that both the prevailing climate of ideas - informed opinion throughout the western world believes inflation is harmful to economic growth - and the prevailing circumstances, namely intense competition driven by the arrival of new technologies and the globalisation of markets, combine to make a revival of inflation in the next five years quite unlikely.

But are we really entering an era of zero annual average price increases? Maybe, but don't bet your pension on it.

* The Death of Inflation by Roger Bootle is published by Nicholas Brealey at #16.99

Business Book of the Week is compiled and edited by Stuart Paul of the University of Paisley