The New Economic Policy (or NEP) was introduced in the Tenth Party Congress, held in 1921 . By this time, Lenin had realised that socialism in Russia was unlikely to succeed unless there was an international socialist revolution (which, in the short term, did not look very likely) or they came "to an agreement with the peasants". The NEP was the latter.
In 1921, having effectively won the Civil War, the incredibly unpopular requisitions of all 'surplus' grain from peasants involved in War Communism became less necessary. Peasant revolts occurred throughout Russia, as, with the demobilization of the Red Army, they began to take back their grain. This meant that the workers could not get their bread and so the strikes, which had been so effective against the Tsar were resumed against the Bolsheviks. Production fell to 13% of pre-war levels. This, for a government that claimed to represent the proletariat, was not a good thing.
These revolts included the Kronstadt uprising. The Kronstadt sailors had been particularly vocal supporters and participants of the revolution and so their declaration of a desire for "Soviets without Communists", was difficult to dismiss as tsarist. The revolt began on the 7th of March. The congress began on the 8th.
The NEP worked roughly as follows: grain would no longer be requisitioned, it would be taxed at a certain percentage. The peasants could do what they wanted with the remainder. It initially varied depending on the region but it was fixed at 10% in 1922. They could lease labour if they wanted to.
More astute readers will note that this appears to be a retreat back to capitalism. It was, but was only intended to be temporary, in the same way as the Treaty of Brest-Litovsk was. Many Bolsheviks unsurprisingly reacted badly to its introduction. However, to avoid such confrontations during the congress, Lenin delayed the introduction of the resolution until the 15th of March, the penultimate day of the congress and by this point many delegates had left to aid the suppression of the Kronstadt sailors.
As Bukharin told the Comintern the following July, they were making "economic concessions in order to avoid political ones". Lenin, however, did not see it as being quite so temporary as many in the party probably imagined. In May of 1921, he told the party that it had to be adopted "seriously and for a long time". This dedication to the NEP stemmed from Lenin's belief that, as he told the 1921 congress, only "countries of developed capitalism" could make an "immediate transition to socialism". In Russia, as a result of the revolution, the "'bourgeois revolution" had not been completed and so different tactics needed to be used to institute a socialist state.
The Bolsheviks were opposed to private trade, so arguments against the NEP arrived quite quickly. Would the hungry be able to afford the newly traded goods? If money made a comeback, wouldn't rich people return too? These questions seemed to be vindicated by a rise in unemployment in the first two years of the NEP. Opponents of the NEP dubbed it the "New Exploitation of the Proletariat"
This anger was focused on "Nepmen", who were responsible for most of the trade that resulted from the NEP. Whilst peasants could sell their grain back to the state if they wished, they could make a bigger profit with less difficulty by selling it to these entrepreneurial fellows. They spent their new-found wealth in a similar manner to how most people would spend it if they got it these days. They drove imported cars, bought their wives diamonds and fur coats and lost what remained at casinos. However, as a result the post-revolution mood that hung over most Russians, they were not treated with great reverence. They found it difficult to get credit, their rent was higher and so were the tuition fees for their children.
This was largely where the return to capitalism ended. The government kept control of, railways, banks and the major industries. Only factories employing less than twenty people were denationalized.
Initially, the NEP did not do very well, as rural prices dropped and urban prices increased. In 1923, the government took action to lower food prices. Nationalized trusts were pressured, and credit rationing and price regulation were introduced. By 1924, the economy was improving, paving the way for Stalin to abolish it.
The peasantry probably did not expect this, thinking, in their naive, ignorant way, the NEP would be permanent. But that's another story.
Sources:
http://mars.acnet.wnec.edu/~grempel/courses/stalin/lectures/NEP.html
http://www.spartacus.schoolnet.co.uk/RUSnep.htm
Orlando Figes, A People's Tragedy: The Russian Revolution 1891-1924 ISBN: 071267327X - I got most of my quotes from this.
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