He became Chancellor on May 20 1932, as head of a coalition government, designed to tackle the problems caused by the Great Depression. However, Dollfuss' majority in Parliament was almost non-existent; deflationary policies were unpopular and created deep hostility from the Austrian Social Democratic Workers' Party of Austria (SDAPÖ), within Parliament and without. Consequently, Dollfuss suspended Parliament indefinitely in March 1933, and governed by decree. Dollfuss arguably also had another reason for the suspension of democracy in Austria - the Nazis. With Adolf Hitler now German Chancellor, it looked increasingly likely that in future elections, the Austrian National Socialists (DNSAP) would gain a majority, and Austria would cease to exist as a state. Accordingly, Dollfuss banned the DNSAP in June, and the SDAPÖ in February 1934. Some historians argue the Nazis coming to power in 1933 in Germany spurred Dollfuss taking an authoritarian line, whilst others argue that this was already underway in 1932.

Dollfuss was drawn to Italian fascism and levered support from fascist Italy against Nazi Germany, gaining a guarantee for Austria's independence from Italy in August 1933 in exchange for radical political reforms along Fascist lines. He also exhanged 'Secret Letters' with Mussolini about ways to guarantee Austrian independence.

In September 1933 he formed an umbrella grouping to support the regime, the Vaterländische Front and merged the Christian Social Party with the paramilitary Heimwehr (Home Guard), a Nationalist group. The regime which was installed by him and remained in power until 1938 is often called Austrofascism, while the regime designated itself Ständestaat. Dollfuss has been satirized by Jura Soyfer.

Dollfuss was a very short man, and his 'diminutive stature' was made fun of. He was known as 'Millimetternich', and the 'Jockey'. The New York Times also reported a series of jokes, including how in the coffee houses of Vienna, one could order a 'Dollfuss' cup of coffee instead of a 'Short Black' cup of coffee (black being the colour of the clericals).

He was assassinated by eight Austrian Nazis, who entered the Chancellery building and shot Dollfuss in an attempted coup d'etat, as a prelude to Anschluss. Immediately after the assassination of Dollfuss Italian armed forces mobilized at the Austrian-Italian border, to attack German military units, if these would try to invade Austrian territory. The Nazi assassins in Vienna however surrendered and were executed. Kurt Schuschnigg became the new chancellor.

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