The classical theories of interest no longer have relevancy, because the lending industry is largely socialized and the interest rate is no longer determined by demand and supply. Its basis now is a pure gratuity or subsidy, and is determined solely by political expediency.

The time is coming when the banks will not be able to subsist on the present rate, due to the inflationary increase in their expenses, unless the volume is very much increased. It is just as easy for a bank to lend two or three dollars as one, and since there is no hazard in lending to the government, the coming squeeze may be relieved by the automatic action of inflation, in that the government will be obliged to borrow more from the banks as inflation progresses.

I say obliged on the assumption that the present policy continues. In fact, however, the government is in no wise dependent upon the banks. The reverse is the case, since the Treasury may at any time it chooses merely issue checks against itself, and such checks would clear through the banks just like bank checks. This may be the ultimate resort, but in the meantime the Treasury has the problem of keeping the banks on an earning basis. Therefore, the Treasury will compensate the banks for their increasing expenses by increased volume of loans until the end. Otherwise it will be obligated to raise the rate. This alone determines the future of interest rates.