New Economic Policy

New Economic Policy (NEP), a policy of temporary economic liberalization in the Union of Soviet Socialist Republics (USSR) from 1921 to 1928. NEP was introduced to revitalize the economy, increase food production, and permit business growth after several years of civil war.

By the early 1920s, the Soviet economy had suffered terribly from civil war (1918-1922) and the harsh measures of War Communism (1917-1921), an economic policy that replaced market mechanisms with a quasi-military economic structure. In 1920 industrial output was less than one-seventh its pre-revolutionary level. Low grain production in 1920 and 1921 led to a famine in which about five million people died. Vladimir Lenin, the head of the Soviet government, introduced NEP to revitalize the country's economy by liberalizing trade and production in agriculture and industry. In place of government requisition of surplus output from peasants, NEP allowed farmers to sell their produce on the open market after paying a tax proportional to their net output. Peasants were permitted to lease land and hire laborers, both of which had been outlawed under War Communism. Small and medium-size industrial enterprises were privatized, with the state retaining ownership and control of the so-called “commanding heights”—finance, transportation, heavy industry, and foreign trade. Money was reintroduced in 1921 to replace a system of barter, quotas, and commands. Under NEP, the Soviet economy grew rapidly, and by 1928, production in agriculture, industry, and transportation exceeded pre-revolutionary levels.

Several economic imbalances developed during NEP, however, and led to the Soviet decision to reassert central control. Rising industrial prices prompted government officials to place price ceilings on non-agricultural goods in an attempt to control inflationary pressures. Government procurement prices for grain were lowered in the mid-1920s, prompting peasants to withhold selling their produce in anticipation of higher prices. Price controls on industrial and agricultural products proved ineffectual, however, due to the presence of private traders (called Nepmen) who bought and sold items in response to supply and demand. Under the direction of Communist party General Secretary Joseph Stalin, who viewed the activities of peasants and Nepmen as a threat to the socialist state, agricultural production quotas were reinstated in 1929, and in 1930 private trading became a criminal offense.

Stalin replaced NEP with his own economic programs known as the Five-Year Plan. In the first Five-Year Plan (1928-1932), central planning replaced market mechanisms, and a strict state-controlled regime dominated the Soviet economy until the dissolution of the USSR in 1991.