Economic statecraft has returned as an instrument of great power competition, though perhaps not in forms policymakers entirely recognize yet. Technology export controls tighten around semiconductor supply chains. Financial systems exclude designated adversaries. Governments speak openly of “friend-shoring” and “strategic autonomy” as though the mere invocation of strategy renders economic reorganization costless. What was recently coordination through markets has become competition through market fragmentation, yet the transformation receives little public scrutiny regarding its economic logic.

The assumption underlying much current policy discourse is straightforward: interdependence creates exploitable asymmetries. If your adversary depends on your technology, your markets, or your financial infrastructure, you possess leverage to extract political concessions or impose strategic costs. Dependence flows in one direction; advantage follows accordingly.

This is not entirely new. In 1919, the Treaty of Versailles pursued systematic economic pressure against Germany under conditions of deep European interdependence. The effort failed, though not immediately and not in ways its architects anticipated. The question worth examining is whether that failure revealed constraints specific to that historical moment or whether it revealed something more general about how economic coercion functions when systems are deeply integrated.

John Maynard Keynes, resigning from the British Treasury in protest, spent the summer of 1919 analyzing precisely this question. His conclusion was not primarily moral but analytical: the Treaty’s economic provisions could not achieve their stated objectives because they violated basic arithmetic about how interdependent systems function. Whether his analysis identified temporary obstacles or more durable constraints remains relevant, particularly as contemporary policy experiments with similar tools under rather different technological conditions.

Economic Subordination

The Treaty aimed to weaken German economic capacity through strangulating terms. Her merchant fleet, colonies, and foreign investments were confiscated; her commercial access to world markets substantially curtailed. Alsace-Lorraine was handed over to France, carrying seventy-five percent of Germany’s iron ore production. The Saar coalfields also went for fifteen years, Upper Silesia’s fate to be decided by plebiscite. Germany’s rivers were internationalized under commissions dominated by former enemies, while railways and port facilities in ceded territories passed to Allied control without compensation.

The political logic was security through economic subordination. If Germany could not rebuild industrial capacity, she could not rearm. If she lost control of critical resources, she could not threaten her neighbors. The calculation seemed straightforward: reduce German power, increase Allied security.

Yet Germany had surrendered not unconditionally but on agreed terms. Wilson’s Fourteen Points specified restoration of occupied territories, impartial adjustment of colonial claims, removal of economic barriers, and equal trade conditions. The Armistice transformed these principles into binding commitments on which Germany surrendered. The Treaty then materially altered those terms, particularly regarding reparations and economic treatment. This shift complicated not merely the moral position but the credibility of future economic commitments, a practical consequence Allied planners appear not to have anticipated.

The observable outcomes unfolded across the 1920s. European economic recovery proceeded more slowly than anticipated, hampered by the strangulation of what had been the continent’s industrial hub. Currency destabilization followed: German hyperinflation destroyed middle-class savings; Austrian and Polish monetary systems came under severe strain. Political radicalization tracked economic distress in patterns Keynes had predicted would emerge when populations reached the limits of endurance. Reparations were repeatedly renegotiated downward: Dawes Plan, Young Plan, then substantial reduction, until by the 1930s the Treaty’s economic framework had largely dissolved and its political consequences had become severe.

A sustained effort at economic pressure under conditions of interdependence produced measurable results over two decades. The question is what patterns, if any, can be extracted from that experience, and especially from Keyne’s critique?

Mutual Exposure

Keynes’s analysis began with an observation about structure. Germany before 1914 had functioned as a hub of European commerce, though few fully grasped what this meant for the Treaty’s logic. She was the largest customer of Russia, Norway, Holland, Belgium, Switzerland, Italy, and Austria-Hungary. She was the second-largest customer of Britain, Sweden, and Denmark, and the third-largest customer of France. The relationship ran both directions: Germany was also the largest supplier to most of these countries, providing industrial goods, machinery, and chemical products that other European economies required for their own production.

This was not simply bilateral trade relationships but network structure, and networks behave differently than the Treaty’s architects appear to have assumed. Weaken the hub and you affect all connected nodes. German purchases of Russian grain, Swedish iron ore, and Italian textiles funded those countries’ purchases of German machinery and coal, which in turn enabled their own industrial production and agricultural exports. France needed German coal to utilize Lorraine’s iron ore deposits effectively. Britain needed German markets for industrial exports. Europe as a whole depended on German productivity to maintain living standards that had already declined substantially during the war. The Treaty proceeded as though you could substantially reduce German economic capacity while leaving the rest of Europe’s productive system intact. Keynes’s arithmetic suggested otherwise: the victorious powers required German economic recovery for their own prosperity, though political rhetoric made this truth difficult to acknowledge.

This created what Keynes identified as a fundamental tension: measures designed to weaken Germany economically would impoverish the victors. Network reciprocity meant mutual exposure, not unilateral vulnerability. The Treaty appeared to confuse punishment with extraction, assuming both could be achieved simultaneously. The confusion was not accidental but reflected political necessity: Allied governments had promised their publics that Germany would pay the costs of war while also being rendered permanently harmless. The economic tension between achieving both objectives could not easily be acknowledged without admitting the promises themselves were somewhat incompatible.

Keynes also traced a secondary pattern that would amplify the Treaty’s effects. The economic disruption and fiscal pressure the Treaty imposed would force governments across Central Europe to print money to cover deficits they could no longer finance through normal channels. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency,” he wrote. The prediction proved largely accurate: hyperinflation destroyed not just German savings but political stability across the region. Economic pressure triggered financial instability well beyond the immediate target, creating conditions where desperate populations would reach for radical solutions. The pattern he identified was not limited to the 1920s: economic disruption strains fiscal systems, forces inflationary monetary responses, and amplifies instability, a sequence that has repeated across vastly different economic conditions.

The Problem of Payment

The Treaty’s most substantial difficulty lay in its treatment of reparations. Germany was to pay significant sums over thirty years, with the precise total left deliberately vague to preserve political flexibility. Keynes asked a question that seemed almost naive in its simplicity: pay how? Not whether Germany deserved to pay, not whether the moral claims were justified, but through what economic process the transfer would occur.

Payment in a modern economy requires several sequential steps. First, Germany must generate domestic fiscal surplus through taxation or reduced government spending. Second, she must convert that domestic surplus into foreign exchange by exporting more than she imports. Third, foreign markets must absorb those German exports, providing the foreign currency needed for reparations payments. Each step presents obstacles, but the Treaty made the second and third considerably more difficult while demanding the first be maximized.

The Treaty confiscated Germany’s merchant fleet, eliminating her capacity to transport exports competitively. It took her colonies, removing markets where German goods had enjoyed preferential access. Most critically, it transferred her coal and iron resources, undermining the foundation of her industrial export capacity. Germany needed to export coal to earn foreign exchange. She needed to export machinery and steel, but the Treaty transferred much of the iron ore required to produce them. The Treaty then demanded payment in foreign currency that Germany had limited means to acquire because the same Treaty had substantially reduced the export capacity necessary to earn it.

This was what Keynes termed the transfer problem. Even if Germany could somehow generate export surpluses, those exports would enter European markets, potentially driving down prices and displacing Allied production. French and British workers might lose employment to German competition, the very competition the Treaty was ostensibly designed to limit. Allied governments would face political pressure to restrict German exports through tariffs and quotas, but restricting exports meant restricting the process of reparations payment. The Treaty appeared to create conditions where German compliance with its terms faced structural obstacles.

The Reparations Commission embodied this tension at the institutional level. It held two objectives: maximize payments from Germany and preserve sufficient German economic viability to continue making payments. These objectives conflicted not accidentally but structurally. Every measure that weakened Germany reduced her capacity to pay. Every measure that strengthened her appeared to contradict the security logic of keeping her weak. The Commission could not optimize both simultaneously, yet it was prohibited from abandoning either objective. The result was not stable policy but periodic crisis requiring ad hoc renegotiation.

History provides some validation of his analysis. Reparations were renegotiated in 1921 through the London Schedule, reducing initial demands. They were renegotiated again in 1924 through the Dawes Plan, which reduced them further and provided German loans, borrowed substantially from American investors, to enable payment. In 1929 the Young Plan reduced them yet again. Finally, in 1932, reparations were largely abandoned at Lausanne. Germany never paid what the Treaty originally envisioned because the process of payment faced substantial obstacles. This was not solely about German unwillingness or insufficient Allied pressure. It suggested that extracting resources from a system while simultaneously reducing that system’s capacity to generate resources faces inherent difficulties.

The Economic Consequences

The Treaty’s third structural challenge concerned what happens when you fragment integrated systems. Pre-1914 Europe had achieved something historically unusual: nearly three hundred million people living within three empires with minimal internal barriers to trade, capital movement, or labor migration. Currencies remained relatively stable and convertible. Property and contracts were reasonably secure across borders. This integration enabled specialization, scale, and efficient resource allocation in ways that had transformed European productivity.

The Treaty altered this architecture substantially. Austria-Hungary was partitioned into multiple successor states, each establishing its own currency, tariff barriers, and regulatory apparatus. Germany lost territory to Poland, France, Belgium, and Denmark. New borders appeared throughout Central Europe: between Germany and Poland, Austria and Czechoslovakia, Hungary and Romania. Each border meant customs inspections, currency conversions, regulatory incompatibilities, and transaction costs that had not existed before.

These costs do not scale linearly, which is what made the Treaty’s approach economically significant. Each new border interacts with every other border in the network. When you fragment one integrated market into twenty separate units, you do not multiply transaction costs by twenty but by some exponential function of the increased friction. Scale economies disappear as production becomes nationally circumscribed.

Keynes attempted to assess whether the security benefits of fragmentation exceeded these efficiency losses. His calculation suggested they might not, though the assessment involved incommensurable values: How do you compare the reduced probability of German aggression against the ongoing loss of European productivity? The Treaty made this calculation implicitly, apparently valuing security substantially higher than efficiency. But the question Keynes posed remained: Could Europe sustain the economic costs the Treaty imposed? And more troublingly: Would those economic costs ultimately undermine the security the Treaty was designed to achieve?

The observable outcome provides some evidence. European economic performance in the 1920s lagged considerably behind the United States, which maintained an integrated continental market. Productivity growth remained sluggish. Currency instability prevented the restoration of normal trade patterns. Investment remained depressed as businesses faced uncertainty about border arrangements and monetary stability. By fragmenting the economic system, the Treaty imposed costs that persisted well beyond the immediate postwar adjustment, costs that no amount of reparations could offset, even if Germany could somehow have paid them.

A Conclusion for Geoeconomics

The Treaty of Versailles failed not from insufficient will but from fundamental confusion about how integrated systems respond to pressure. Network reciprocity meant damage could not be contained to its target. Transfer constraints made extraction incompatible with destruction. Fragmentation costs multiplied beyond what planners anticipated. Allied governments refused to recognize these as binding limits, treating them instead as obstacles political determination could overcome.

The refusal served political necessity. Publics had been promised that Germany would both pay for the war and be rendered permanently harmless. Acknowledging the tension would have meant admitting the promises were incompatible. The Treaty confiscated the means of payment while demanding payment, then interpreted German non-compliance as willful defiance rather than what it was: structural impossibility made predictable by the Treaty’s own terms.

What distinguishes Keynes’s analysis is his method for examining economic coercion under interdependence. He began not with intentions or political will but with mechanisms: through what actual process would payment occur? How do networks propagate disruption? What happens when you fragment integrated production systems? The questions were mechanical before they were political. This approach yields three analytical requirements for examining geoeconomic instruments. First, assess whether damage can be contained. When production networks cross borders multiple times, restricting access at one point affects all participants. The calculation is not whether costs can be imposed but whether they fall asymmetrically. Second, determine what compliance actually requires. If pressure eliminates the target’s capacity to comply, willfulness becomes irrelevant. Third, compare fragmentation costs against security gains through magnitude rather than assertion.

The Treaty demonstrated these constraints bind even when political will is strong and enforcement conditions favorable. Whether they bind equally under contemporary technological configurations remains empirical. What changes are the specific mechanisms through which networks propagate costs, the particular resources required for transfer, and the technologies being fragmented. What persists is the analytical task: trace how systems actually function rather than assume what outcomes pressure can achieve. The Treaty’s architects had abundant will and favorable conditions. What they lacked was analysis of how interdependent systems actually respond to coercion. That remains the essential task.