During World War I, Tsarist Russia experienced famine and economic collapse. The demoralized Russian Army suffered severe military setbacks, and many soldiers deserted the front lines. Dissatisfaction with the monarchy and its policy of continuing the war were fertile ground for revolution. During the revolution, the Bolsheviks had adopted the popular slogans "all power to the Soviets!" and "land, peace, and bread!" Soviets were councils assembled locally within a city with delegates elected from the workers of the various factories and other businesses. Soviets were the bodies of direct popular democracy; although they held no official position of power in the provisional government, they exerted considerable influence over the hearts and minds of the working classes.

After the revolution, the party leadership devised a constitution that appeared to recognize the authority of the local Soviets. The highest legislative body was the Supreme Soviet. The highest executive body was the Politburo (see Organization of the Communist Party of the Soviet Union). The first leader of the Soviet Union was Vladimir Lenin, who led the Bolshevik faction of Communists. Popular pressure induced Lenin to proclaim the Bolshevik seizure of power in October of 1917. One of the first acts of the Communist government was to withdraw from World War I. Following the peace Treaty of Brest-Litovsk, the Soviet Union turned over most of the area of Ukraine and Belarus to Germany.

Vladimir Lenin
The Bolsheviks, later the Communist Party of the Soviet Union (CPSU), initially enjoyed only a tenuous, precarious hold on power. They were also divided among their own party rank and file on tactics and some policy issues. Despite these problems, they quickly consolidated their hold on state power over progressively larger portions of the country, and enacted laws prohibiting any effective rival political party under the banner of "democratic centralism."

Prior to the revolution, the Bolshevik doctrine of democratic centralism argued that only a tightly-knit and secretive organization could successfully overthrow the government; after the revolution, they argued that only such an organization could prevail against foreign and domestic enemies. Fighting the civil war would actually force the party to put these principles into practice.

Arguing that the revolution needed not a mere parliamentary organization but a party of action which would function as a scientific body of direction, a vanguard of activists, and a central control organ, Lenin banned factions within party. He also argued that the party should be an elite body of professional revolutionists dedicating their lives to the cause and carrying out their decisions with iron discipline, thus moving toward putting loyal party activists in charge of new and old political institutions, army units, factories, hospitals, universities, and food suppliers. Against this backdrop, the nomenklatura system would evolve and become standard practice.

In theory, this system was to be democratic since all leading party organs would be elected from below, but also centralized since lower bodies would be accountable to higher organizations. In practice, "democratic centralism" was more centralist, with decisions of higher organs binding on lower ones. Over time, party cadres would grow increasingly careerist and professional. Party membership required exams, special courses, special camps, schools, and nominations by three existing members.

In December 1917, the Cheka was founded as the Bolshevik's first internal security force. Later it changed names to KGB. These "secret police" were responsible for finding those viewed by the party as counter-revolutionary and expelling them from the party or bringing them to trial. On September 5, 1918 the Cheka was given responsibility for targeting remnants of the Tsarist regime, opposing parties of the left such as the Social Revolutionaries and other anti-Bolshevik groups such as the Cossacks, the policy of Red Terror. Said Felix Dzerzhinsky, first head of the Cheka, June, 1918 in the newspaper, New Life: "We represent in ourselves organized terror - this must be said very clearly - such terror is now very necessary in the conditions we are living through in a time of revolution,"

Creation of the USSR
On December 29, 1922 the RSFSR, the Transcaucasian Socialist Federated Soviet Republic, and the Byelorussian and Ukrainian Soviet Socialist Republics signed a Treaty of Creation of the USSR forming the Soviet Union by a conference of the representatives, which was confirmed on December 30, 1922 by the 1st Congress of Soviets of the USSR.

The New Economic Policy (NEP), in which the state allowed a limited market to exist. Small private businesses were allowed and restrictions on political activity were somewhat eased. However, the key shift involved the status of agricultural surpluses. Rather than simply requisitioning agricultural surpluses in order to feed the urban population (the hallmark of War Communism), the NEP allowed peasants to sell their surplus yields on the open market. Meanwhile, the state still maintained state ownership of what Lenin deemed the "commanding heights" of the economy: heavy industry such as the coal, iron, and metallurgical sectors along with the banking and financial components of the economy. The "commanding heights" employed the majority of the workers in the urban areas. Under the NEP, such state industries would be largely free to make their own economic decisions.

The Soviet NEP (1921-29) was essentially a period of "market socialism" similar to the Dengist reforms in Communist China after 1978 in that both foresaw a role for private entrepreneurs and limited markets based on trade and pricing rather than fully centralized planning.

Agriculture, however, would recover from civil war more rapidly than heavy industry. Factories, badly damaged by civil war and capital depreciation, were far less productive. In addition, the organization of enterprises into trusts or syndicates representing one particular sector of the economy would contribute to imbalances between supply and demand associated with monopolies. Due to the lack of incentives brought by market competition, and with little or no state controls on their internal policies, trusts were likely to sell their products at higher prices.

Stalin's consolidation of power

Stalin shifted from side to side and eventually rid the party of both factions by forging a path of development that integrated the ideas of both camps. He adapted the "leftist" stance that opposed market agriculture because they wanted to produce the material basis for communism quickly, through a planned economy, despite unfavorable conditions. But he also endorsed the "rightist" faction's notion of "socialism in one country" which favored concentrating on internal development rather than exporting revolution. In that respect, he also favored extensive exports of grain and raw materials; the revenues from foreign exchange allowing the Soviet Union to import foreign technologies needed for industrial development.

The economy of the Soviet Union was based on a system of state ownership and administrative planning. The Soviet Union forged the modern world's first centrally planned economy; and from a notably undeveloped position at the time of the Bolshevik Revolution, the Soviet economy developed into the most powerful in the world after that of the United States. From 1928 to 1991 the entire course of the economy was guided by series of ambitious five-year plans. The nation became among the world's three top manufacturers of a large number of basic and heavy industrial products, but lagged behind in the output of light industrial production and consumer durables.
Based on a system of state ownership, the Soviet economy was managed through Gosplan (the State Planning Commission), Gosbank (the State Bank) and the Gossnab (State Commission for Materials and Equipment Supply). Beginning in 1928, the economy was directed by a series of five-year plans, with a brief attempt at seven-year planning. For every enterprise, planning ministries (also known as the "fund holders" or fondoderzhateli) defined the mix of economic inputs (e.g., labor and raw materials), a schedule for completion, all wholesale prices and almost all retail prices.
Industry was long concentrated after 1928 on the production of capital goods through metallurgy, machine manufacture, and chemical industry. In Soviet terminology, the capital goods were known as group A goods, or means of production. This emphasis was based on the perceived necessity for a very fast industrialization and modernization of the Soviet Union. After the death of Stalin in 1953, consumer goods (group B goods) received more emphasis.

Starting in 1928, the five year plans began building a heavy industrial base at once in an underdeveloped economy without waiting years for capital to accumulate through the expansion of light industry, and without reliance on external financing. The country now became industrialized at an unbelievable pace, perhaps surpassing Germany's pace of industrialization in the nineteenth century and Japan's earlier in the twentieth. After the reconstruction of the economy (in the wake of the destruction caused by the Russian Civil War) was completed, and after the initial plans of further industrialisation were fulfilled, the explosive growth slowed down, but still generally surpassed most of the other countries in terms of total material production (GNP) until the period of Brezhnev stagnation in the second half of the 1970s.
Industrialization came with the extension of medical services, which improved labor productivity. Campaigns were carried out against typhus, cholera, and malaria; the number of physicians increased as rapidly as facilities and training would permit; and death and infant mortality rates steadily decreased.
The Soviet planned economy was not tailored at a sufficient pace to the demands of the more complex modern economy it had helped to forge. As the economy grew, the volume of decisions facing planners in Moscow became overwhelming. The cumbersome procedures for bureaucratic administration did not enable the free communication and flexible response required at the enterprise level for dealing with worker alienation, innovation, customers, and suppliers.

Constant lowering of prices by the planning agencies led to an unfortunate side effect. As the prices dropped below the equilibrium point, people were always buying all available stock, leading to "empty shelves". The actual food consumption was high, but psychologically the empty shelves proved to be very hard to endure. Even though per capita consumption of most products (with the exception of meat) in Soviet Union was higher than in the United States, people were unhappy.

Calls for greater freedom for managers to deal directly with suppliers and customers were gaining influence among reform-minded Communist cadres during the mid-1970s and 1980s. Since the dissolution of the Soviet Union, all but a handful of the 15 former Soviet republics scrapped their Soviet-era systems of centralized planning and state ownership, with mixed results.

To solve the housing shortage, prefabrication seemed the answer. In the 1960s, apartment blocks made from low-quality, concrete, shot up around every Soviet city. The Soviet Union's inability to calculate things like "cost" and "profit" manifested in unfinished apartment blocks, begun in the days when the city still believed it would continue to grow, and abandoned when it became clear that it would not.