ABSTRACT
In the debate in monetary economics over ‘rules’ versus ‘discretion’ there is one issue that receives little attention because it appears to have been settled long ago – what to do in a crisis. Here, the textbooks tell us, Walter Bagehot proved that there is one and only one correct course of action – ‘lend freely at high interest rates’.2 The appropriate policies for non-crisis periods are debated, and the appropriate arrangements for assuring that the monetary authority has the power to act on Bagehot’s principle are debated, but the rule itself and Bagehot’s case for it are seldom discussed.
