PROTECTION AND WEALTH BUILDING STRATEGIES 241this is exactly what happened from 1933 to 1936 in the middle
of the Great Depression.
What characterizes a depression is that growth does not
return to long-term potential, and total output, labor force
participation and asset prices languish below prior peaks in
some combination. This definition was first laid out by John
Maynard Keynes in 1936 in his magnum opus, The General
Theory of Employment, Interest and Money. It is not mathemati-
cally precise, but it is highly serviceable.
The importance of Keynes’s definition is that depressions
are not merely longer or more persistent versions of a reces-
sion. They are qualitatively different. A recession is a cyclical
phenomena amenable to liquidity and interest rate solutions
applied by central banks, whereas depressions are structural
and do not respond to central bank remedies.
Depressions are only cured by structural changes in areas
such as fiscal policy, regulation, and labor markets that are not
controlled by central banks, but rather by legislatures and the
executive. Indeed, the U.S. is in a depression today, and its
persistence is due to the fact that positive structural changes
have not been implemented. Federal Reserve policy is futile in
a depression.
Because depression has been dropped from the economist’s
tool kit, few are familiar with depression dynamics. Because
the last depression was 80 years ago, there is almost no one
alive today with a living memory of a depression. This vacu-
um of analysis and experience lends urgency to the historic
study of depressions, and there is no finer history of the Great
Depression than Amity Shlaes’ The Forgotten Man.
The conventional narrative of the Great Depression is
known by rote. Herbert Hoover and the Federal Reserve are
the typical villains who committed a series of policy blunders
that first caused the depression, and then failed to alleviate it.
Franklin Roosevelt is portrayed as the hero who saved