How We Built the Arsenal of Democracy

By Arthur Herman

Thursday, July 24, 2025

 

The bad news is, 30 years after the end of the Cold War, our nation’s defense-industrial base is in serious crisis.

 

The good news is we’ve been here before.

 

According to a recent report from the Commission on the National Defense Strategy for the United States (an independent, bipartisan group established by Congress in 2022), the factories, facilities, plants, and shipyards of our current defense-industrial base are “grossly inadequate” for confronting the dual threats of Russia and China. The Defense Department agrees. Its first-ever Defense Industrial Strategy document highlighted “serious shortfalls” in the existing base, including manufacturing, supply chains, workforce, and production, and it concluded that “this call to action may seem a great cost, but the consequences of inaction or failure are far greater.”

 

That was under the Biden administration. The “big, beautiful bill” passed by Congress and signed by Trump at least tries to undo the damage of the past 30 years. It sets aside $29 billion for shipbuilding and other spending tied to our naval and maritime industrial base; our officials are belatedly realizing the two are intertwined and inseparable. It spends another $25 billion for munitions spread across various programs — the war in Ukraine demonstrated that our industrial base is not making enough conventional artillery shells. Another $5 billion will be invested in the critical minerals needed for building today’s weaponry, and $16 billion will go toward innovative technologies such as drones, AI, and low-cost weapons.

 

All this, however, will take time, which is in shorter supply even than money. All in all, it’s a grim situation we’re only beginning to address.

 

We’ve been here before, on the eve of World War II. The result five years later was the creation of the greatest military-industrial complex in history. But the answer then, as now, didn’t spring from Congress or the Oval Office. It came from corporate boardrooms around the country.

 

In 1940, the United States had the 18th-largest army in the world, right behind tiny Holland. While equipped with modern carriers and battleships, the Navy faced too many global commitments with meager resources; it was not prepared to face a potential invader like Hitler’s Germany. General George Marshall, Army chief of staff, warned Roosevelt that if Hitler landed five divisions on American soil, there would be nothing he could do to stop them. Meanwhile, within a year and a half, the Navy’s vaunted battleships sat at the bottom of Pearl Harbor.

 

America found itself systematically unable to meet the demands of modern mechanized warfare on land, sea, or air. Neither the War nor Navy Departments had plans for how to revive a defense-industrial base that had been largely dismantled after World War I.

 

That critical summer of 1940, Roosevelt found a corporate leader willing to undertake the task: mass-production wizard and General Motors President William “Big Bill” Knudsen. Knudsen told FDR that, given 18 months’ head start, he and his colleagues could mobilize enough of American industry to trigger the single greatest outpouring of modern weaponry the world had ever seen, from planes, tanks, and machine guns to ships, submarines, and aircraft carriers.

 

Roosevelt decided to give Knudsen and his colleagues a free hand, based on three key principles.

 

The first was mobilizing America’s biggest and most productive companies to make what was needed, even if they had never made war matériel before. Knudsen turned to the automotive, steel, chemical, and electronics industries because they had the largest engineering departments — men (and sometimes women) who could figure out how to produce the decisive weapons the military needed in record numbers, from bazookas (GE) and torpedoes (Westinghouse) to entire B-24 bombers (Ford) — eventually even the plutonium for an atomic bomb (DuPont).

 

Second, Knudsen insisted that FDR clear away antibusiness tax rules and regulations, including suspending antitrust laws, so industry could focus on producing what the armed forces needed, not dodging government lawsuits. That included pushing aside the Navy and War Departments’ antiquated rules for procurement, which reflected leisurely peacetime conditions, not wartime emergency.

 

Third, Knudsen insisted on keeping the entire process voluntary, so corporate leaders would be free to decide on their own which war matériel they were best suited to contract for, and how to produce it. The point was to reduce Washington’s interference in the production process and make sure that federal dollars followed the trail of productivity and innovation, not the other way around.

 

The plan worked. By the time Japanese bombs fell on Pearl Harbor in December 1941, the scale of American war production was already approaching that of Nazi Germany. America was on the way to becoming what Roosevelt famously dubbed the “arsenal of democracy” (a phrase that was coined by Knudsen). By the end of 1942, America was producing more tanks, ships, planes, and guns than the entire Axis.

 

The numbers are still staggering, every time we look at them. From 1940 to 1945, the U.S. produced 141 aircraft carriers; eight battleships; 807 cruisers, destroyers, and destroyer escorts; and 208 submarines. It produced 324,000 aircraft, 88,410 tanks, 2.4 million trucks, 2.6 million machine guns, and 41 billion rounds of ammunition.

 

By 1944, American industry was producing eight aircraft carriers a month, 50 merchant ships a day, and a warplane every five minutes. Two-thirds of all the war matériel used by all the Allies in World War II came from America — as did the most powerful innovative weapon in history, the atomic bomb.

 

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In one sense, the challenge this time of turning around our current defense-industrial base will be easier. In terms of talent, innovation, and basic physical facilities, we already have the best military-industrial complex on the planet. It’s true that we are no longer the manufacturing center of the world we once were. In 1945, the United States hosted one-half of the world’s industrial capacity. Today it’s less than 16 percent. Today it’s China that enjoys the edge, at just over 30 percent. The Chinese have unleashed their manufacturing base to build up their forces on land, sea, air, and space in ways that suggest they’ve learned — or at least think they’ve learned — the lessons of World War II better than we have.

 

One thing is clear. The rebuilding of our defense-industrial base can’t, and won’t, rest on the big defense contractors alone, the Boeings, the Lockheed Martins, and the Northrop Grummans. They bring a lot to the process: talent, experience, and unsurpassed skill in integrating many supply chains and subcontractors into complex workable wholes. But they are not the drivers of today’s high-tech economy the same way that Ford and GM and General Electric were the drivers of our industrial economy when they armed America for World War II. They have become too tethered to the bureaucratic workings of today’s Pentagon to be the main architects of tomorrow’s.

 

Fortunately, a new generation of patriotic business leaders — from Elon Musk and Vivek Ramaswamy to the CEOs of high-tech defense companies like Palantir and Anduril and General Atomics — are waiting for the opportunity to transform their companies into powerhouses of a new arsenal of democracy. The same is true of the leaders of the “Magnificent Seven” tech companies, including Jeff Bezos of Amazon, Sundar Pichai of Google, and Jensen Huang of Nvidia. Give them the right kind of call, as Roosevelt did with Bill Knudsen and Henry Kaiser in 1940, and they will answer.

 

This raises a broader point about rebuilding our defense industries. If we are going to leap ahead of China in critical areas such as shipbuilding, space, and hypersonics, we’ll have to deploy an extremely innovative series of technologies and policies that allows us to reinvent our manufacturing base as a whole. A great place to start will be the defense-industrial base.

 

In fact, those who bemoan the shrunken state of our manufacturing economy and complain that we don’t have enough time or resources or workers to rebuild that base are looking at the problem from the wrong end. By reinventing the economic sector most vital to our national security — the defense-industrial sector — we can achieve ripple effects throughout the rest of the economy. But only if we unleash the energy and dynamism of the private sector to solve our most pressing issues in the public sector.

 

Overall, there are six steps we can take to reinvent a defense-industrial base for the 21st century.

 

First, the new administration has to sweep aside the regulations and obstacles that slow our productive defense sector. One of those obstacles is the Pentagon budget system itself, which is encrusted with rules and red tape more suited to the industrial age than the space age. Congress needs to adopt the reforms recommended by its commission on Pentagon budget reform. (Full disclosure: I helped to write that commission’s interim and final reports.)

 

Second, engage the best advanced technologies to accelerate production and innovation. Most big defense-manufacturing facilities are set up for very limited types of production, such as the F-35 or Virginia-class submarine. The future of defense production, however, lies in diversifying the manufacturing process itself, through the use of AI, robotics, and 3-D printing. The ultimate goal should be to produce multiple products at once: for example, advanced sensors with one line geared for defense and national security, the other for commercial purposes.

 

Third, make use of a host of smaller, leaner, more specialized defense companies that provide vital supply chain support and subcomponents for larger defense contractors such as Lockheed Martin, RTX, and Anduril — all here in the United States. They will also be important laboratories for developing new approaches to manufacturing and the technologies that will support that effort — not only for our defense base but for a revived commercial base as well.

 

Fourth, incentivize a new generation of workers for defense and defense-related industries. A study by the think tank Third Way showed that in 2022 some 600,000 Americans were in registered apprenticeship programs. That’s barely 0.3 percent of the working-age population in the country. That number is five times higher in Canada, seven times higher in Germany, and twelve times higher in Switzerland.

 

Instead of focusing on apprenticeship programs for the big defense contractors, bring the programs to the smaller, more innovative players. In Germany, for example, so-called Mittelstand (small and medium-size businesses) actively engage their younger workers in fashioning the business itself: More than 80 percent offer incentives for workers to contribute new ideas. The American equivalent can be seedbeds for building a new industrial workforce that is engaged, creative, and productive.

 

Fifth, enlist the universities in developing defense-related technologies, including AI and quantum computing. University-based research and development were crucial to the military-industrial complex during the Cold War. One of its historic offshoots was Silicon Valley. Bringing university research to small- to middle-scale defense firms, not just the big contractors, can save not only our defense-industrial base but also our universities in the post-woke era.

 

Sixth, incentivize venture capitalists to fund our national security. Venture capitalists are expert at finding opportunities in commercial markets but not so good in understanding defense applications. If we rethink defense production as a step in successful commercial manufacturing, rather than the other way around, we could open the floodgates for the $1.3 trillion venture capital market to flow directly into the defense and defense-related realm. That would be a key advantage over China, as well, where new venture capital investment in 2025 will barely hit $70 billion.

 

In that regard, it’s time for the Pentagon to encourage defense producers to think about how their products can open a niche in commercial markets as well as meet military requirements. That won’t just draw in private capital investment. It’s how defense producers can make their products more innovative and cost-effective, in order to compete in the commercial marketplace.

 

The arsenal of democracy in World War II was built by companies large and small who had first made their mark as commercial companies. Defense specialists — firms with little or no commercial business — accounted for only 6 percent of the Defense Department’s major programs at the end of the Cold War. In 2024, it was 61 percent. It’s time to turn those numbers back around. By doing so, by unleashing the energy, creativity, and drive of the private sector to rebuild our defense-industrial base, we can trigger a tech-industrial revival of the American economy — one that makes us more secure and more prosperous far into the future.