From Finance to Extremism: The Real Effects of Germany's 1931 Banking Crisis

54 Pages Posted: 28 Mar 2018

See all articles by Sebastian Doerr

Sebastian Doerr

University of Zurich - Department of Economics

Stefan Gissler

Board of Governors of the Federal Reserve

Jose-Luis Peydro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 19, 2018

Abstract

Do financial crises radicalize voters? For identification, we analyze the canonical case of Germany in the 1930s exploiting a large bank failure in 1931 caused by fraud, foreign shocks and political inaction. We use detailed bank-firm connections on banks that served the whole country. We provide causal evidence from banking crisis to economic distress and extreme radical voting, while the literature in general has found no clear effect of economic distress on Nazi Party support. We show that, first, the failure of Jewish-led Danatbank induced a strong reduction in the wage bill for connected firms. This led to increasing city-level unemployment in cities with more Danat-connected firms. The effects are notably stronger in cities with a higher share of non-exporting firms, where local demand spillovers are higher. Second, Danat exposure significantly increased Nazi Party support between 1930 and 1933 elections, but not between 1928 and 1930 - before the banking crisis but after the start of the Great Depression and high unemployment. The financial crisis increased support for the Nazi party the most in areas with both deep-seated historical anti-Semitism, and more net savers than borrowers. Not only did the banking crisis help the Nazis rise to power, but cities with higher Danat exposure saw fewer marriages between Jews and gentiles after the banking crisis. Also, after 1933, there were more attacks on Jews and their property in Danat-exposed cites, and deportation rates were higher.

Keywords: Financial Crises, Real Effects, Great Depression, Democracy

JEL Classification: E44, G01, G21, N20, P16

Suggested Citation

Doerr, Sebastian and Gissler, Stefan and Peydro, Jose-Luis and Voth, Hans-Joachim, From Finance to Extremism: The Real Effects of Germany's 1931 Banking Crisis (March 19, 2018). Available at SSRN: https://ssrn.com/abstract=3146746 or http://dx.doi.org/10.2139/ssrn.3146746

Sebastian Doerr (Contact Author)

University of Zurich - Department of Economics ( email )

Schönberggasse 1
Office G-05
Zürich, 8004
Switzerland

HOME PAGE: http://www.sdoerr.com

Stefan Gissler

Board of Governors of the Federal Reserve ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Jose-Luis Peydro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://www.barcelonagse.eu/Faculty.php?id=432

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Hans-Joachim Voth

University of Zurich - UBS International Center of Economics in Society ( email )

Raemistrasse 71
Zuerich, 8006
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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