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. Last Updated: 07/27/2016

NEP: Capitalism for a Day

It happened in the early months of 1992, and for anyone who had lived in Moscow, it was astounding. People -- babushkas, young men, housewives, virtually all of society -- were lined up in the center of the capital selling whatever they could lay their hands on. It was one gigantic street bazaar, and nobody was breaking it up.


Never before had this been permitted. True, lines had snaked out into the streets every day for the previous 10 or 15 years. But those lines had formed outside the state shops, to buy state goods from state employees. Suddenly, for the first time, anybody could sell.


Only it wasn't the first time. Here is a description of Moscow, circa 1922 -- one year into the New Economic Policy, or NEP -- from Boris Pasternak's "Doctor Zhivago":


"The ban on private enterprise had been lifted and trade within certain narrow limits was allowed. Deals were made on the scale of the turnover of a rag and bone merchant in a flea market and their pettiness led to profiteering and speculation. No new wealth was created by these transactions and they did nothing to relieve the squalor of the town, but fortunes were made out of the futile selling and reselling of goods already sold a dozen times over."


The new "entrepreneurs" included, according Marquette University's Alan Ball, Russians from all social sectors, who lined the streets of Russia's major cities to sell anything they could find -- most often nothing more than their personal possessions.


The more ambitious among the new traders traveled by train in search of items to buy and resell, or of customers for their goods. These became known as "bagmen," and their modern equivalents can be seen travelling from station to station on the metro's circle line at any time of the day.


Ball, citing one NEP-era source, wrote that by the spring of 1921, more than 200,000 bagmen had travelled the rails in Ukraine.


The NEP, like the period since the inauguration of perestroika, was one of transition for Russia. But it was a transition moving in the opposite direction from that of the last 10 years, at least in the view of the architects of each process. Far from being a transition to market economics, Lenin and the other Bolshevik leaders saw the restoration of market elements as no more than a tactical retreat from the goal of imposing socialism -- a maneuver necessitated by a host of crises.


The crises facing the infant Soviet state at the start of the 1920s were, indeed, immense. Russia had experienced back-to-back demographic catastrophes: at least 2 million men died during World War I, and another 3.5 million perished during the civil war which followed the Bolshevik coup d'etat in 1917. Industrial production collapsed, stopping short the country's prerevolutionary movement toward economic modernization. Coal output -- around 29 million tons in 1913 -- plummeted to 9 million tons by 1920. Iron ore extraction dropped from 9.2 million tons in 1913 to 129,000 tons in 1921. The depression hit virtually all branches of the Russian economy: According to one estimate, the country's GNP fell by more than 60 percent between 1913 and 1921.


In addition, the exigencies of war, revolution and civil war had triggered a brain drain of epic proportions. As many as 2 million people left Russia between 1917 and 1921. These refugees were not simply the landed gentry and other representatives of the ancien regime, but engineers, industrial managers and other technocrats needed for economic modernization, as well as those providing essential services, such as doctors and teachers.


When civil war broke out in the wake of the 1917 seizure of power, the Bolsheviks imposed a harsh set of policies on the population, known collectively as "War Communism." These included the food distribution system known as prodrazverstka, which in effect meant the requisitioning of grain -- often at bayonet point. The system was accompanied by an ideological campaign against the kulaks, or so-called "rich" peasants, who were accused of hoarding "surplus" grain.


With War Communism also came a policy of labor "militarization," conceived and administered by People's Commissar for War Leon Trotsky in 1920. Trotsky believed that a barracks-like regimen was necessary until the working class could be successfully imbued with "socialist consciousness." The workers, in the words of historian Alec Nove, would "have to be compelled to do what was needed -- and it was the leadership who knew what it was."


The policies of War Communism triggered a backlash: No sooner had the Bolsheviks defeated the Whites and their Western allies on the battlefield than resistance broke out among the workers and peasants, the very classes for workshops, which had been nationalized during the two prior years, to private businessmen and cooperatives; in May of that year, the decree nationalizing small-scale industry was revoked.


The state kept control over banking, foreign trade and large-scale industry, but the role of the private traders -- who became known in the popular parlance as "Nepmen" -- expanded. While the overwhelming majority of factories remained in the hands of the state, the output of small-scale and handicrafts industries was in an ever-growing number of private hands.


Some of the new traders, feeling more secure that communist orthodoxy was a thing of the past, began to move their businesses out of the shadows and into retail shops.


By 1924, the Nepmen accounted for over half of the procurement of butter and eggs, as well as an indeterminate but large percentage of grain sales: According to Ball, private middlemen accounted for as much as half of the grain purchases in some parts of the Soviet Union. As much as 75 percent of retail trade was in private hands by 1923.


The inauguration of the NEP also brought about changes in the state sector, which had grown into a nightmare of bureaucratic inefficiency following the Bolsheviks' initial attempts to impose strict central planning.


In late 1921, the government decided, in Nove's words, to "rebuild state industry on a new commercial basis, to shed surplus staff and to compel efficient operation by making management pay its way."


To this end, the Supreme Council of National Economy, or VSNKh, the Soviet state's economic planning organ, was divided into autonomous units known as "trusts," each controlling a number of enterprises. This trust idea would later find echoes in Mikhail Gorbachev's granting of greater autonomy to enterprise managers, as well as the financial-industrial groups that have become increasingly prominent in the Russia over the last few years.


The state no longer was given priority in the allocation of goods and services. If a trust or large enterprise could get a better deal from a trading organization, or even a private contractor, they were allowed to take the financially rational step. State enterprises themselves found it profitable to deal directly with the Nepmen.


According to Ball, by the middle of the NEP period, half of all state-manufactured consumer goods were being sold to private traders -- who, in turn, sold them to the population.


In the generally frenzied buying and selling that characterized the period, competing trusts resorted to what was called razbazarivanie, or the methods of the bazaar, to unload their raw materials or manufactured goods: They joined the private traders and set up outdoor stalls.


The NEP, however, was by no means a magic formula for economic growth and prosperity. In 1921, the policy's first year, the grain harvest was only 43 percent of the immediate pre-World War I average.


This disaster, the result of the Bolsheviks' repressive agricultural policies during the prior several years, led to mass starvation in the countryside. The death toll will never be known, but some estimates put it in the millions. The disaster was mitigated by aid from the American Relief Administration, headed by future U.S. President Herbert Hoover.


In addition, with the lifting of price controls under NEP, the value of the sovznak, the Soviet Union's nominal currency in the early post-revolutionary days, depreciated at a rate rivaling that of the Weimar mark.


In July 1922, the Bolshevik government took a measure which would have warmed any Thatcherite or Reaganite heart: It embraced a gold standard, and issued the chervonets, a new gold-backed currency. During the rest of that year and through 1923, the chervonets and sovznak existed side by side.


In 1993, economist Grigory Yavlinsky revived the idea, advocating the introduction of a new gold-backed currency to circulate in tandem with the rapidly devaluating ruble. The sovznak eventually devaluated into oblivion. One Soviet economist of the period commented that "the time is not far distant when the sum of those nominal rubles will exceed the number of all atoms or electrons of which our planet is composed." The moribund currency was withdrawn in 1923, and the newly created State Bank, along with the People's Commissariat of Finance, pursued a tight, remarkably un-socialist monetary policy.


The landscape of the NEP was characterized by a wild patchwork of ever-proliferating state bureaucratic organs and new private businesses with Soviet-sounding names like Snabprodukt -- it was, after all, better to keep a low profile.


Communist orthodoxy uneasily co-existed with free-wheeling trade, outright fraud and criminality; communal flat-dwellers and the newly-rich lived side-by-side in the same apartment blocks.


At the end of his novel, Pasternak describes Zhivago doing odd jobs for recently arrived neighbors, "particularly racketeers who had made fortunes at the beginning of the NEP, and artists and scholars who stood close to the government."


The atmosphere of the period is captured in the works of Mikhail Bulgakov, as well as such classics as the 1931 novel "The Little Golden Calf," by Ilya Ilf and Eugene Petrov. In the latter, a group of con men who have coincidentally converged on the town of Arbatov, each posing as the son of revolutionary hero Lieutenant Schmidt, decide to join forces. In order to carry out the expropriation of an underground millionaire, who they have tracked to Chernomorsk, the band sets up a front operation, which they call the Chernomorsk Division of the Arbatov Office for the Storing of Horns and Hoofs.


Many Russians in the NEP period had indeed taken to heart Bolshevik leader Nikolai Bukharin's exhortation to "Get rich!" and the fruits of the Soviet Union's experiment in quasi-market economics impressed even foreign observers. American industrialist Armand Hammer, in his 1932 book "The Quest of the Romanoff Treasure," waxed poetic about the availability of a "great variety of food products and delicacies ... the choicest French wines, liqueurs and the best of Havana cigars."


"The finest English cloth lay side by side with the most expensive perfumes," Hammer wrote. "It took the magic of the NEP to bring forth these goods from their hiding places in cellars, barns and secret hoards."


The economic successes of the Nepmen, however, were leading to increasingly open economic disparities, and were breeding resentment at both the elite and popular levels. Indeed, the NEP was a source of intra-Party friction. Orthodox Bolsheviks had long regarded the new policy with suspicion, viewing it as an open door to resurgent capitalism. The fact that the Nepmen had gained such an important role in the grain trade, for example, was to them an unforgivable violation of revolutionary principles.


Secondly, while the new traders were steadily improving their lot, the efficiency drive in the state sector and the new financial conservatism was taking a toll on industrial workers.


The average monthly wage in 1920-21 was 12.15 rubles, according to statistics from the period; it had been 30.49 rubles in 1913. It rose marginally over the next three years, and only approached the 1913 level when industry finally began to recover in the mid-1920s. Unemployment rose rapidly and remained high throughout the decade.


In 1923, the economy was hit by the so-called scissors crisis: The prices for manufactured products rose well above the pre-World War I level, while prices for agricultural goods dropped well below the 1913 level. This severe price imbalance led to further widespread layoffs and work speed-ups in the industrial sector, which in turned sparked labor conflicts.


As a result, suspicion of the new entrepreneurs on the part of orthodox Bolsheviks was coupled with resentment from average Russians, and the Nepman's position in society was never fully guaranteed. This, in turn, reinforced the short-term, "shady" nature of NEP capitalism.


"Most of these Nepmen were not real capitalists: They were speculators," said Harvard University historian Richard Pipes. "They showed off their wealth in very obnoxious ways: They had their wives and mistresses dressed up in furs; they would go to expensive restaurants. They flaunted their wealth, and so they were greatly disliked, not only because the government mocked them, but because the population at large did not like them."


Curtailment of the NEP began around mid-decade. As early as 1925, the government began to re-institute price controls on basic industrial materials, fuels and freight transport, and credits began to be disbursed administratively.


Over the next two years, the VSNKh increased controls over the production and distribution of key commodities. Calls for strengthened central planning, discipline and the predominance of "large scale socialist industry" were voiced at the meetings of various Communist Party ruling bodies in 1926.


By that year, industrial production had already surpassed the 1913 level, and there were growing signs that the state was returning to its previously commanding role in the economy. The percentage of private turnover in total trade went from 42.5 in 1924 and 1925, to 22.5 in 1928. The Nepmen were being squeezed out.


In 1926-27, the government embarked on a campaign to restrict private trade, the ultimate goal being the "elimination of the new bourgeoisie." In 1927, it began formulating the Soviet Union's first five-year plan.


By 1928, the state's campaign to "liquidate the Nepmen" was in full swing. The results of that campaign -- shortages, endless lines, rationing -- were not far behind.