This chapter again uses data from the Bank’s ledgers, cash books, and other records to examine its policy decisions over much of the eighteenth century (1711—1791). Examination of these data indicates that the Bank’s accounting was highly focused on accurate tabulation of the total stock of Bank money. It is argued that this money stock had two functional components, de facto splitting the bank into two institutions: a passive bank whose money originated from customers’ deposits of coins under receipt, and an active bank whose money originated from open market purchases of metallic assets and credit operations. The data show that from 1727 forward, the active portion of the Bank’s money was systematically adjusted to balance out (sterilize) fluctuations in the passive portion. The chapter also discusses two crisis episodes when this policy approach broke down: (1) a financial panic in the autumn of 1763 that required a liberalization of the receipt system, leading to unbalanced expansion of the passive bank; (2) excessive lending to the Dutch East India Company during the Fourth Anglo-Dutch War (1780—1784), leading to a contraction of the passive portion and overexpansion of the active. The effects of the latter crisis were sufficiently severe that the Bank never fully recovered.

This chapter asks how a new generation of central banks in the interwar period changed their function, away from state financing and financial stability provision, and toward stabilizing prices and avoiding fiscal and financial dominance. The new concept of a central bank as an institutional constraint, imposed from the outside, and movement from a “can do” to a “can’t do” institution, ultimately ended in failure. It made for bad policy and poor outcomes, specifically contributing failure to stem contagion in the 1931 financial crisis. After 1945 a new reinvention of central banking involved the elaboration of a social consensus that bought back ele-ments of the “can do” environment.