Monday, May 30, 2011

Mises Did Not Predict the US Stock Crash of 1929

I see that someone has dragged up a stupid myth about Mises in one of the comments.

The claim is that Mises predicted that US stock market crash in 1929 and (presumably) the later depression. The source of this nonsense is a story by Fritz Machlup that can be conveniently found in Skousen (2009):
“As his assistant in the university seminar which met every Wednesday afternoon, I [i.e., Fritz Machlup] usually accompanied him home. On these walks we would pass through a passage of the Kreditanstalt in Vienna [one of the largest banks in Europe]. From 1924, every Wednesday afternoon as we walked through the passage for pedestrians he said: ‘That will be a big smash.’ Mind you, this was from 1924 onwards; yet in 1931, when the crash finally came, I still held some shares of the Kreditanstalt, which of course had become completely worthless” … In the summer of 1929, Mises was offered a high position at the Kreditanstalt bank. His future wife, Margit, was ecstatic, but Lu surprised her when he decided against it. ‘Why not’ she asked. His response shocked her: ‘A great crash is coming, and I don’t want my name in any way connected with it’ … (Skousen 2009: 295–296).
In the world of Austrian apologists, this prediction of the failure of one Austrian bank is transformed into the prediction of US stock market crash in 1929. Mises is alleged to have warned his future wife that “a great crash” was coming, but I have seen no evidence to suggest he was referring to America or a global depression, or anything other than the Kreditanstalt bank with that statement.

The only other evidence one can find is Mises’ introduction to the English version of his The Theory of Money and Credit published in 1934, where he claims that Austrians had “foreseen” the crisis, even though the depression had been going on for years at that point. You don’t need to be a genius to “predict” something years after it actually happens.


Skousen, M. 2009. The Making of Modern Economics: The Lives and Ideas of the Great Thinkers (2nd edn.), M.E. Sharpe, Armonk, N.Y.


  1. It seems that Mises could not predict the Great Depression since praxeology is "not subject to verification and falsification on the ground of experience and facts." In fact, it would seem that if Mises did predict the Great Depression, this would imply that his own theory is incorrect. Perhaps I'm missing something here?

  2. Given the "Austrian" analysis of the business cycle a crash is always coming. It has to, as banks are extending credit and so artificially lowering the interest rate. Why do bank's do this? Because they want to make profits...

    Needless to say, it could be equally argued that the Marxists were vindicated by the Crash of 1929. They were also arguing that capitalism would crash. However, unlike the Austrians their predictions of a crash were driven by an understanding that capitalism is a system riddled with contradictions and driven to crisis by its dynamics.

    Thus we have Marx, in volume 3 of Capital, discussing how credit expansion fuels the up-swing of the business cycle and so deepens the inevitable crisis. Unlike the "Austrians" he recognised that banks extend credit because they are capitalist firms seeking to make a profit and are affected by the rest of the market.

    An Anarchist FAQ

  3. Mises also "predicted" the sterling would have a week at most to live after going off gold. Last time i checked it was alive and kicking.

    Anyway, if you predict bad things will happen day after day, year after year, you're bound to be right now and then and that's essentially what Austrians do. Not because they've gotten to that point in some reasonable fashion, just because they seem to like doom. It's like one of those end-of-the-world religions or something.


  4. What evidence exists that Mises predicted the Great Depression? When I emailed the question to a Mises Institute faculty member I knew, who forwarded it to other affiliated persons, I got a lot of "I don't know" type of responses. These men who continuously repeated this tale to the Mises University students like myself had no idea how to substantiate it.

    Roger W. Babson predicted the stock market crash. I suppose Mises could have predicted the Great Depression. But that doesn't mean his theories are correct. As Anonymous I above mentioned, Mises' theories can't be empirically tested under the Austrian School paradigm. So, really, why do they bother perpetuating the story?

  5. It is true that Mises was not very specific in his prediction, and yes, it is true that he only predicted the crash of only one bank. However, you fail to understand the reason why Austrians make the connection in the first place. The same expansionary policies used in Europe that the Austrians believe caused the fall of the Kreditanstalt and similar banks at the time were similar to the policies taken in the U.S. before the great depression, which then caused a global downturn.

    "It seems that Mises could not predict the Great Depression since praxeology is 'not subject to verification and falsification on the ground of experience and facts.' In fact, it would seem that if Mises did predict the Great Depression, this would imply that his own theory is incorrect. Perhaps I'm missing something here?"

    I'm glad you asked. First of all, a correct prediction based on praxeology does imply a correct theory. However, he is saying that a theory is not proven simply because the prediction turned out to be true.

    A simple example: If an alien were to observe a train station with no prior logical knowledge, it would see people bustle to and from the train station exactly when the clock strikes 9 am and 5 pm. The alien might come to the conclusion that the clock striking 9 am and 5 pm "causes" people to move in and out of the station. This is obviously not true. It is much more complex. A logical thinker would see reason why individuals go to the station is because they are each pursuing their own subjective goals of their own free will, whether that is to go to work, to go shopping downtown, or to visit relatives. These subjective goals may change based on the free will of the people acting and based on new information.

  6. According to his wife, who wrote a book about Mises, he said "there's a great crash coming and I don't want my name in any way connected with it", when he rejected a prestigious job offer from Kreditanstalt. It is a fact that he refused the job. We can discuss the credibility of the source that he did so because he saw the depression coming. I am convinced since Hayek, closely related at that time with Mises, predicted it publicly.