2o8 THE GENERAL THEORY OF EMPLOYMENT bk. IV

scarcely anyone could be induced to part with hold-ings of money on any reasonable terms.

(4) There is, finally, the difficulty discussed insection iv of Chapter 11, p. 144, in the way of bringingthe effective rate of interest below a certain figure,which may prove important in an era of low interest-rates; namely the intermediate costs of bringing theborrower and the ultimate lender together, and theallowance for risk, especially for moral risk, which thelender requires over and above the pure rate of interest.As the pure rate of interest declines it does not followthat the allowances for expense and risk decline paripassu. Thus the rate of interest which the typicalborrower has to pay may decline more slowly than thepure rate of interest, and may be incapable of beingbrought, by the methods of the existing banking andfinancial organisation, below a certain minimum figure.This is particularly important if the estimation of moralrisk is appreciable. For where the risk is due to doubtin the mind of the lender concerning the honesty of theborrower, there is nothing in the mind of a borrowerwho does not intend to be dishonest to offset theresultant higher charge. It is also important in thecase of short-term loans (e.g. bank loans) where theexpenses are heavy;—a bank may have to charge itscustomers ij to 2 per cent., even if the pure rate ofinterest to the lender is nil.

IV

At the cost of anticipating what is more properlythe subject of Chapter 21 below it may be interestingbriefly at this stage to indicate the relationship of theabove to the Quantity Theory of Money.

In a static society or in a society in which for anyother reason no one feels any uncertainty about thefuture rates of interest, the Liquidity Function L 2 , orthe propensity to hoard (as we might term it), will