Developed by Swedish economist Knut Wicksell (1851-1926), loanable funds theory of the rate of interest posits that interest rates are determined by the supply and demand of loanable funds in the capital markets.
Loanable funds theory of the rate of interest suggests that investments and savings determine the long-term level of interest rates, whereas short-term rates are determined by financial and monetary conditions in the economy.
It was widely accepted before the work of English economist John Maynard Keynes (1883-1946).
Also see: term structure of interest rates
D H Robertson, Essays in Monetary Theory (London, 1940)