First, with their capital given, banks can respond to an externally imposed increase in their capital/asset ratios only by shrinking assets. That is – or should be – obvious. With loans to the private sector as their main asset, they had to tell their borrowers that in future facilities would not be available on the same scale or would be more expensive. In other words, the withdrawal of credit lines and the increase in the cost of bank finance in late 2008 and early 2009 were the direct result of the increase in capital/asset ratios imposed on the banks by officialdom (Brown, King, etc.), in its determination to be tough on the City of London. 

Secondly, banks' liabilities take two main forms: deposits, mostly owed to the general public, and capital. Capital can be either equity or bonds, but we need not bother too much over the details here. Deposits are money, capital is not. If banks' balance sheet is given, the effect of recapitalisation — of raising the proportion of capital to total liabilities — must be to reduce the quantity of deposits (that is, of money). More concretely, when a financial institution subscribes for newly-issued bank equity, it pays over a sum from its deposits to the bank. The deposits disappear from the economy. Money is destroyed and new claims on the bank, ordinary shares, are created. 

Brown and King might protest that in 2008 and 2009 officialdom's insistence on more bank capital served vital objectives. It made banks less risky, which was important in protecting the taxpayer (in case Northern Rock, RBS and so on could not repay loans from the Bank of England) and giving them greater creditworthiness in the global inter-bank market where they needed to raise new funds. Even old-fashioned central bankers would acknowledge that, ultimately, banks must try to be well-capitalised so that they can justify themselves in the marketplace. Commercial banks should avoid dependence on exceptional (and expensive) support from the central bank. 

All the same, the demands that banks shed risk assets and build up their capital were responsible for the drastic change in financial conditions in 2007 and 2008, and hence for the crash in the rate of money growth. Indeed, an article in the Bank of England's Quarterly Bulletin earlier this year contained some fascinating numbers on the subject. It quantified the extent of the damage to the quantity of money from both the weakness of bank lending and "banking sector stabilisation", as it termed the recapitalisation exercise. In its words, the issuance of new equity and bonds by the banks "acted as a negative shock to the supply of broad money". The article's authors judged that "a reasonable estimate" of the "total drain" on broad money from the net issuance of equity and bonds was "around £240 billion since the recession began". (The Quarterly Bulletin article was called  "Understanding the recent weakness in broad money growth" and written jointly by Jonathan Bridges, Neil Rossiter and Ryland Thomas. To get a sense of scale, £240 billion is much more than 10 per cent of the UK's M4 quantity of money. Remember that Friedman and Schwartz believed that a fall of a third in the quantity of money was responsible for the US's Great Depression.)

We are now in a better position to see why Osborne should take a sceptical view of Vickers's recommendations. The mishandling of Britain's banks and a collapse in money growth blighted the closing years of the 1997-2010 Labour government, and caused a deep recession which wrecked Gordon Brown's reputation for competence in running the economy. The central mistake was to be so tough on the banks that they stopped expanding their businesses, which checked the growth in the quantity of money.