Indeed, the consensus on the need for more bank capital is so widely shared that Osborne is expected to endorse Vickers's recommendations with little hesitation. But Osborne needs to think harder and seek a wider range of advice. The role of banks in modern capitalist economics is extraordinarily complex, with macroeconomic variables interacting in countless, often perverse ways. Even someone like Osborne  —  who confesses to being a politician to the fingertips — must recognise the relevance of arcane debates in economic theory to practical decision-taking. The truth is that his response to the Vickers report will have a strong influence on the pace of the economic recovery and hence on the outcome of the next general election. He should keep his distance from the Vickers report for several reasons. 

For a start the Vickers assault on the banks makes sense if the banks, and only the banks, were to blame for the Great Recession of late 2008 and 2009. But the widespread readiness to condemn the banks is highly debatable. Certainly, some banks did silly things in the run-up to the crisis. In 2006 and 2007 HBOS and RBS were lending money with the assumption that asset prices — and, more specifically, the prices of houses and commercial property — would behave in the next few years as they had done in the previous few. Naively, they had believed Gordon Brown when he proclaimed that the boom-bust cycle would never return. In retrospect RBS and HBOS were too confident that the non-inflationary, consistently-expansionary environment of the 15 years from 1992 would continue forever. That confidence, and the resulting complacency on asset prices and borrowers' capacity to repay debt, must now be judged a dreadful mistake. 

Nevertheless, the British banking system as a whole has made profits during the Great Recession, while banks have honoured their obligations to each other in their daily settlements and depositors have at all times been able to withdraw cash. Some banks tend to have trouble in most financial crises, but recessions of the severity of late 2008 and 2009 are exceptional, once-in-a-lifetime events. An argument can be made that the cause of the Great Recession was not the misdeeds of the banking industry, but shocking blunders in the official response to the problems that a handful of banks undoubtedly faced. 

Some history helps to explain and understand these blunders. In their path-breaking 1963 study A Monetary History of the United States Milton Friedman and Anna Schwartz showed that the dominant cause of the US's Great Depression in the early 1930s was a collapse of over a third in the quantity of money. The UK's boom-bust cycles of the 1970s and 1980s were also characterised by extreme fluctuations in the growth rate of the quantity of money. During the booms the annual rate of money growth ran in the high teens or even the twenties, whereas in the busts it would fall to low single digits. The historical record suggests that, as Friedman recommended on numerous occasions, policy-makers should try to ensure that money growth is fairly steady from year to year. 

What, in fact, were UK monetary trends before the Great Recession? And what has been the pattern during the Great Recession itself? The short answer is that — yet again, as in other periods of macroeconomic turmoil — the quantity of money has been subject to drastic instability. In the three years to the third quarter of 2007, when the run on Northern Rock signalled the start of the crisis, the annual rate of money growth was too high, at just over 10 per cent. By contrast, since early 2008 the quantity of money has grown at under 2 per cent a year. (The quantity of money here is the usual broadly-defined measure, M4, but with some awkward customers known as "intermediate other financial institutions" cut out of the picture. Roughly speaking, M4 consists of all the notes and bank deposits held by non-bank private sector agents. "Intermediate other financial institutions" are semi-banks, neither banks nor non-banks. As their balance sheets can be artificially inflated by transactions within banking groups, they need to be eliminated from the data.)