Abstract: In Australia, as in the rest of the industrialised world, social capital has been identified as a key element in rural regeneration. For example, the Prime Minister, John Howard, speaks openly of the need for a 'social coalition' between communities, governments and businesses that will build social cohesion and trust at community level. For two decades successive Australian governments have followed the world-wide trend in industrialised nations to devolve responsibility for social welfare programs to local areas and to nongovernment agencies, the stated rationale being to break down welfare dependency and to promote individual responsibility. The dismantling of the welfare state and the triumph of capitalism have been defining features of the Australian landscape in recent years. Meanwhile globalising trends have had significant effects on Australian rural people. Rural populations have higher rates of aging and ill health and many rural areas are experiencing increasing levels of poverty and unemployment. It would appear that there has never been a more important time to increase social capital in rural areas. However, government policies of devolution, privatisation and managerialism have been formulated with free market principles as the dominant determinant and with little apparent consideration of the effects on social capital. Services are being withdrawn in many rural areas and in others, NGOs report being overloaded and underfunded. There is widespread acceptance of the view that Australian rural people are becoming more socially isolated and alienated. This paper will examine social capital in Australian rural areas drawing on a case study conducted in a small country town in 2001. It will look at the need to match rhetoric with action and will discuss social policy initiatives that have impacted on the development of social capital.