Thursday, 1 March 2012

Vladimir Lenin and the New Economic Policy

Lenin’s New Economic Policy – a Necessary Retreat from War Communism


In this article, we look at one of Vladimir Lenin’s more controversial decisions - the decision to permit a limited capitalist oriented economic system after the Russian Civil War ended.

We will also examine some related questions:

a)  What impact did Lenin’s decision have on the Soviet economy?
b)  Why was the New Economic Policy abandoned after only a few short years?

Origins of the New Economic Policy

The New Economic Policy, proposed by Vladimir Lenin, replaced the unpopular “War Communism” of the Civil War period (1917-1921).  During the period of “War Communism” the Russian economy was characterized by rigid socialist dogma, State control of property and centralized economic planning. 

As the Civil War entered its final months in the winter of 1920, economic and social conditions continued to deteriorate.  Poor harvests created widespread famine, resulting in millions of deaths.  These severe food shortages were acerbated by the resistance of peasants to the mandatory large quotas of food that had to be surrendered to the central government. 

In addition to the crisis in agriculture, there were general strikes in several cities as urban workers reacted to reduced bread rations, as well as the mutiny of sailors at the Kronstadt naval base.  In the midst of this unrest and high levels of unemployment, with Lenin’s blessing the Tenth Party Congress (March 1921) adopted the New Economic Policy (NEP). 

Key Features of NEP

The forceful expropriation of their crops was one of the major grievances of Russian peasants.  Instead of expropriating their grain, the New Economic Policy introduced a “payment in kind.”
  • Based upon their income and the number of dependents in a family, the State levied a reasonable tax on the farmer.  After this tax was paid, the peasant was free to sell the remainder of his produce privately to generate income.  By 1923 – 1924, the “tax in kind” was replaced by a cash payment.
  •  Outside of agriculture, the New Economic Policy created greater freedom in terms of trade within the Soviet Union.  Prices were no longer set by government fiat, although the State did maintain a monopoly in some commodities (e.g., tobacco).  On the labour front, trade union membership was no longer mandatory and workers were free to seek any type of employment.
  • In 1921, the Soviet government decided to relinquish its ownership of most small and medium sized businesses, allowing them to be owned privately. Larger industrial enterprises as well as banks and railways remained state-controlled as did foreign trade.
Successes under NEP

Under the New Economic Policy, the Soviet government was able to balance its budget relatively quickly (1923 - 1924).  This was the result of new excise taxes as well as corporate and personal taxes on income and property.  The government also re-introduced the previous government monopoly of vodka sales, reduced spending on education and introduced school fees.  All of the above measures contributed significantly to the stabilization of the new Soviet currency (chervonets).

All of the measures introduced as part of NEP were very successful in restoring Russian agricultural production to its pre-World War I level. However, there were still some persistent weaknesses in Russia’s ability to produce food.  While the breakup of the larger commercial sized farms did result in more peasants having access to farmland, these smaller holdings were less efficient.  Access to more efficient farming equipment also remained a problem as the high cost of machinery worked against the implementation of more efficient farming methods.  As a consequence, overall food production continued to lag behind.  By 1927, many members of Russia’s Communist Party became convinced that some additional administrative measures would be needed in addition to the market based incentives already in place.

In the case of industrial activity, production did return to pre-World War I levels by 1926 - 1927.  However, larger scale industrial enterprises continued to face significant problems.  It was very difficult to keep these businesses in operation as critical supplies of fuel and materials remained largely unavailable.  Foreign companies were very reluctant to extend supplies or credit to the new regime, after the Bolsheviks had defaulted on all Tsarist bonds and had confiscated foreign owned businesses.

Beginning in early 1928, the Communist Party leadership started implementing more coercive measures to increase food production, reverting to the forced confiscations that had characterized the period of “War Communism”.  From this point forward, Lenin’s New Economic Policy was effectively dead.  

Under Joseph Stalin, the new priorities were rapid industrialization, military preparedness and the collectivization of agriculture.  These goals required far more capital than could be accumulated through the voluntary individual savings of a predominately agrarian economy.


Lenin’s New Economic Policy was a success, particularly in dealing with the food problem.  It is also clear that the Soviet Union needed a “breathing space”, an opportunity to rebuild and recover from the turmoil of the previous several years and the significant damage inflicted on the Russian economy.  While Lenin felt that the New Economic Policy would exist in the Soviet Union for a long time to come, it was defunct four years after his death as Stalin planned a new course for Russia.

It would have been interesting to see how the Soviet Union developed, had the New Economic Policy endured for an extended period of time.  While Lenin’s successor eventually succeeded in developing Russia’s industrial base, this victory was achieved at a very high cost.