Financial crises and political radicalization: How failing banks paved Hitler's path to power

BIS Working Papers  |  No 978  | 
22 November 2021



Do financial crises fan the flames of fanaticism? Many have argued that the financial crisis of 2007–09 not only wrought havoc on employment and output but that its problematic aftermath of failing financial institutions, public bailouts and austerity may also have paved the way for populists around the world. We examine the canonical case of a radical movement's rise to power: Hitler's Nazi party, which took office in the wake of the severe 1931 banking crisis in Germany – a turning point in modern history.


Several cross-country studies have concluded that a link exists between financial crises and right-wing populist movements. What is still missing are studies demonstrating that a financial shock can lead to a broad-based radicalisation of the electorate, with major political consequences. It has also remained unclear how economic and financial shocks interact with cultural identity in the turn toward radicalisation.


Using newly collected data on the exposure of individual cities to the failure of Danatbank – the bank at the heart of Germany's 1931 financial crisis – we show that a financial shock led to a generalised radicalisation of the electorate. This directly helped the Nazi party to gain power. Importantly, we demonstrate that the financial shock interacted with pre-existing cultural attitudes: the surge in support for the Nazis in response to the shock was greatest in places with a previous history of antisemitism. Voters were radicalised both at the ballot box and in their actions. Once the Nazis were in power, both pogroms and deportations were more likely to occur in places worse affected by the banking crisis.


Do financial crises radicalize voters? We study Germany's 1931 banking crisis, collecting new data on bank branches and firm-bank connections. Exploiting cross- sectional variation in pre-crisis exposure to the bank at the center of the crisis, we show that Nazi votes surged in locations more affected by its failure. Radicalization in response to the shock was exacerbated in cities with a history of anti- Semitism. After the Nazis seized power, both pogroms and deportations were more frequent in places affected by the banking crisis. Our results suggest an important synergy between financial distress and cultural predispositions, with far-reaching consequences.

Keywords: financial crisis, political extremism, populism, anti-Semitism, culture, Great Depression.

JEL classification: E44, G01, G21, N20, P16.