When a reel is specified to have a wood knob, I typically finish the wood with Tru-Oil. Then one reel came back to me with a tight knob. I know that it originally rotated freely; the wood must have shrunken.
So a more intensive treatment for wood knobs is in order. Here is my kit: wine bottle (empty), Vacu Vin, drilled blanks for knobs, and Minwax wood hardener.
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Vacu Vin is a wine bottle stopper and vacuum pump. I do not know how much vacuum it creates, but it must be substantial or else it would not be effective in removing oxygen from a partial bottle.
Recipe: Put knob blanks into bottle, cover with Wood Hardener. Pump down the bottle until you hear the stopper click (much foam when air is pulled out of the wood). Let sit for 1/2 hour. Pour off the excess hardener, extract the blanks and let dry.
I envision that hardener is forced into the wood pores when the vacuum is released.
Update 2 June 2015: Having dealt with several knobs processed this way, I now feel that the stabilization is not adequate. So I am agreed with Terry, it is best to use plastic.
North Branch Reels 
Dave, this is Terry Nab in Idaho, Steve Johnson’s friend. I have also had problems in the past with wood reel handles becoming too tight on the spindle to turn. I think the problem is not that the wood handle is shrinking, but that it swells when it gets wet and when it swells it pushes inward against the metal spindle. I have not been able to find a solution to the swelling with the wood, so I have started to use other materials (i.e. plastic, etc.). Perhaps this will help to give you some insight into the wood handles becoming too tight on the spindle.
Hi Terry. When I first wrote that sentence, I said “swelled’. Then I thought about heating a metal tube; not only does the OD increase but so does the ID. It is the principle behind shrink fits. So I changed the word.
Now, metal is isotropic and wood is anisotropic. But I can’t quite see that difference making an ID become smaller when the wood undergoes a positive change in volume.
One other point: this reel had not been fished. The owner kept it in its bag, inside his safe.
Indeed, I have supplied more reels with plastic knobs than with wood. But I would like for the wood to be an option.
Come out and see us again this summer. Fishing will probably be lousy because we had another severe winter. But you should give those Idaho fish a rest.
Dave
What about pressing a small thin wall brass tube into the knob to stabilize the ID?
Terry,
The problem that I have with this is that it introduces a metal-on-metal interface that would need grease lubrication. (Actually, metal-on-metal oxide interface because the knob pin is anodized 7075.) All other interfaces with relative motion are metal-on-Acetal, which I believe does not benefit from grease lubrication.
Dave