Bagehot's Principle

Bagehot’s Principle suggests that during financial crises, central banks should act decisively to provide liquidity, but only on certain terms—specifically, lending freely to trusted institutions at high interest rates and with strict conditions. The idea is to stabilize the economy quickly while discouraging reliance on emergency support in normal times. This approach helps prevent panic, maintains confidence, and ensures that support is used efficiently, preventing abuse or moral hazard. In essence, it balances urgent intervention with caution to sustain financial stability.