So it was not until 1930 that economists really understood interest rates. However, older ideas about interest rates still circulate, as some folks still think that interest is a bad thing and has to do with banking and money monopolies and the return to capital. What matters in economics is the real rate. Interest rates today are distorted not only from inflation, but from taxes, since interest income is taxed while often interest payments can be deducted from taxable income. Taxes and excessive regulations distort prices and profits in general, further skewing interest rates.
Easy bankruptcy increases the interest rates of loans to folks without much collateral.
The government monopoly of fiat money and its control over the banking system further distorts interest rates. In a pure market, public revenue comes from user fees and land rents, which do not affect interest rates. Interest could be lower than it is today, since one would not have to borrow to pay for land, as the public collection of the rent would drive the price of land down to near zero, and there would be no tax premium. But interest rates would not fall to zero, since even in a prosperous society, young adults would borrow to buy a house and car, and entrepreneurs would want start-up funds to finance a business or some project. Since the natural rate of interest is based on the time preferences of people, when folks want to save a lot of their income, interest rates would be lower, and when they would rather save less, interest rates would be higher.