As it is so often the case, an official reason given might not be the real reason for why something happened. In the case of the Nobel committee of that era, it is indeed the quasi official word that not a single suitable candidate was considered fit to receive the prize.
Another inquiring mind has asked this question before and claims to have had this answer from the committee itself:
to my question, for what reason was no prize awarded in 1935 I got this answer:
"the organization's guidelines state: if no work is found that is considered due to its importance and the guidelines given by alfred nobel, the prize money will be saved for one year. if no prize winner can be determined retrospectively in the following year, then the money will flow into a fund. In addition, there was more information about this in the guidelines:
Translated from: Der Literaturnobelpreis 1935 ...(User: Sakisan, 2007-05-08::12:52:37)/sub>
From the viewpoint of a lover of literature or just a literary critic, this is of course quite absurd; or even absolutely absurd. But when looking at the previous choices for the prize things might become a little bit clearer. In the words of a critic of the whole process, the perspective might change a bit:
As to the early prizes, the censure of bad choices and blatant omissions
is often justified. Tolstoy, Ibsen and Henry James should have been rewarded
instead of, for instance, Sully Prudhomme, Eucken and Heyse. The Academy
which got this exacting commission was simply not fit for the task. It was
deliberately formed as 'a bulwark' against the new radical literature in
Sweden and much too conservative in outlook and taste to be an inter-
international literary jury. It was not until the 1940s — with Anders Österling as secretary — that the Academy, considerably rejuvenated, had the competence to address the major writers of, in the first place, the Western
World. On the whole, criticism of its postwar practice has also been much
more appreciative. Objections in recent times have less often been levelled
against literary quality, rather referred, mistakenly, to political intentions.
Also blame for eurocentricity was common, in particular from Asiatic
quarters, up to the choices of Soyinka and Mahfouz in the 1980s.
Personnel weaknesses and a political agenda against much of what is now widely considered great literature… what's not to like about that?
But this proneness to failure is also almost understandable, when looking at the gargantuan task and impractical schedule the committee set for itself:
The Committee's first task is to trim down 'the long list' nowadays of
about 200 names to some 15, which are presented to the Academy in
April. Towards the end of May, this 'half-long list' is condensed to a 'short
list' of five names. The oeuvres of these finalists make up the Academy's
summer readings. At its first reunion in the middle of September, the
discussion immediately starts, to end in a decision about a month later.
Naturally, the whole production of five writers would be too heavy a
workload for a couple of months but most names of the previous short list
return the current year, which makes the task more reasonable. It should
be added that in recent times a first-year candidate will not be taken to a
prize the same year. In the background looms one of the main failures,
Pearl Buck, the Laureate of 1938. A first-year candidate, she was launched
by a Committee minority as late as 19 September, to win the contest a
short time afterwards, without due consideration.
As was mentioned above, criticism of omissions and bad choices was
often justified as to the early period of the Prize. The Academy headed by
Wirsen made only one choice to get general acclaim by posterity — Rudyard
Kipling, and then for qualities other than those that have shown themselves
to be lasting. The score of the 1910s and the 1920s was better: Gerhart
Hauptmann, Tagore, France, Yeats, Shaw, and Mann have been found
worthy in several appraisals. The results of the period 1930-1939 are
poorer. Two choices have widely been regarded as splendid: Luigi Pirandello
in 1934 and Eugene O'Neill in 1936. But the period offers several laureates
justly judged as mediocre — and they conceal as many cases of neglect:
Virginia Woolf ought to have been rewarded instead of Pearl Buck, and so
on. The Academy of the inter-war years quite simply lacked the necessary
tools to evaluate one of the most dynamic periods in Western literature. The
post-war Academy has in a quite different manner fulfilled the expectations
of serious criticism. The Österling Academy's investment in the pioneers
has received due recognition in many favorable assessments. Names like
Gide, Eliot, Faulkner, Hemingway, and Beckett have won general acclaim.
Some names less known to an international audience, like Jimenez, Laxness,
Quasimodo, and Andric, have attracted criticism as insignificant, but been
classified by experts as discoveries.
(From: Kjell Espmark: "The Nobel Prize in Literature", in: Agneta Wallin Levinovitz & Nils Ringertz (Eds.): "The Nobel Prize: The First 100 Years", Imperial College Press: London, 2001, p 137–159.)
A Nobel Prize is not awarded like an Academy Award for works created in the previous twelve months. Even if that would have been one of the criteria for selecting a winner, every year more than enough candidates would have been eligible for delivering great works over the years. This highly criticised committee with its often very questionable decisions did not manage to nominate and deliver the prize in more than one year.
Taken together it might read almost as if the committee did either not find a suitable candidate to their liking or to the liking of others in the majority of the first 50 years.
This track record seems to indicate that 1935 was just not that special of a 'year in literature' or such an outlier in the behaviour of that committee.