Debt Deflation and the Rise of the Nazi Party

This paper examines the political consequences of debt deflation in interwar Germany. Debt deflation arises when falling prices increase the real burden of pre-existing nominal liabilities. We study this mechanism in the agricultural sector, where farmers had accumulated substantial nominal debt before 1929. In the face of collapsing agricultural prices and falling revenues, the high nominal interest burden made this debt unsustainable. To isolate the political effect of this shock, we exploit pre-crisis differences in agricultural debt and product mix across counties to construct a measure of debt deflation intensity. Our main finding is that rural debt deflation substantially increased support for the Nazi party, reflecting substitution away from agrarian and conservative parties. A one-standard-deviation increase in exposure explains a fifth of one standard deviation in the Nazi party vote share rise between 1928 and 1932. The effect persists after controlling for income shortfalls, unemployment, and austerity, indicating that debt deflation drove radicalization independently of concurrent channels. A counterfactual exercise suggests that without debt deflation, the Nazi party's national vote share would have been insufficient to prevent less extreme parties from forming a majority coalition against it, rendering rural debt deflation a plausibly necessary condition for Hitler's rise to power.