The scraps of paper prised from the frozen and mutilated bodies of German soldiers on the Russian front in the cataclysmic death throes of Nazism in the Second World War almost uniformly speak of a deep longing for the Heimat or homeland.

This was more an idea than a place on a map. The young men, freezing in foxholes that were destined to be their graves, longed for the days of Silent Night around the Christmas tree, steins of cold beer and stomachs full of homemade sauerkraut. Their nostalgia for a homeland that was to be consumed by an Armageddon is understandable. But they were conceived and nurtured in a Germany that was drifting towards a nation hell-bent on conquest and domination.

The major triumph of A Small Circus, among its many conspicuous merits, is to recreate the turbulence and conflict that immediately preceded the rise of Adolf Hitler. Its certainty of time and place is unremarkable given it was written by Hans Fallada, the pen name of Rudolf Ditzen, who had witnessed the final, awful spasms of the Weimar Republic that are so brilliantly captured in the novel.

Fallada, who took his nom de plume from Grimm characters, constructed a tale of morals and manoeuvring that convinces from first to last. A Small Circus begins with a journalist rubbishing the efforts of a circus he has not seen simply because it has refused to advertise in his newspaper. It ends with betrayal, political upheaval and the merest glimmer of hope.

Hope, though, was not to be realised by the writer or his homeland. A sense of foreboding hangs heavily over the novel. This owes something to the reader knowing what the author cannot. Fallada, who completed the novel in 1931, could not envisage the calamity that was to be born in his country and then consume the world. But he offers intimations of the forces that were to collide, creating a political explosion with an awful effect.

The central drama of A Small Circus is a parade by protesting farmers that ends in violence and confusion. The event is used by political parties for their own ends. The major opponents are the right-wing parties and the Communists. The Nazis do not appear until more than 200 pages have been read. Hitler is mentioned – once – after more than 400 pages. However, the tensions that allowed the rise of National Socialism are clearly delineated.

Fallada, though, has written no dry account of political posturing. A Small Circus is an intensely human novel. It is informed by Fallada's ability to portray without offering judgment. Most of the novel is written in dialogue that ensures characters condemn themselves in their own words. "If you have come up the world, then you can't be too sensitive to dirt," says one, openly accepting that pragmatism can and will lead the individual into darker areas. "They are dissatisfied, and dissatisfaction is more valuable than contentment," says another, pinpointing the fuel that would take Germany from Weimar to destruction.

The most poignant line, however, is the almost banal, self-pitying lament of one character to his inner self: "Is he never going to live in peace or have any joy in his life?" Fallada would die in 1947 of a morphine overdose after a life of addiction to drugs and alcohol and an existence in opposition to, and occasionally accommodation with, the Nazis.

In commercial terms, Alone In Berlin, a tale of resistance to Nazism, is his biggest, boldest book. But A Small Circus, adeptly translated by Michael Hofmann, seems more personal, more gripping and more chilling. There is something awful stirring amid the bucolic scenes of hot July days in the streets of Schleswig-Holstein. The small-town intrigues seem farcical, even ultimately innocuous. However, they are the first chapters of a horror story of the resistible rise of evil.

Fallada would survive the war with some difficulty only to be destroyed by personal demons. His characters, though, seem destined to be fodder for the Reich. The Communist mayor surely would end his days in a concentration camp. The outspoken, duplicitous journalist would be broken by his failure to bend. The young right-wing agitator could be imagined writing one of those sentimental letters from a ditch near Stalingrad.

This is all in the future for the inhabitants of A Small Circus. Fallada's brilliance, though, has invested the streets of the fictional town of Altholm with an authentic sense of threat and created characters that may be German in their specific political concerns but also are frighteningly, universally human. The evil in the streets of Altholm seems muted, everyday. Yet it led to Stalingrad and Auschwitz, Treblinka, Dachau and so many other places of unspeakable horror.

A Small Circus

Hans Fallada

Penguin Classics, £20