Arsenal of Democracy 2.0: Mobilizing Modern Capital for America’s Defense

By: General Timothy M. Ray, USAF (Ret.) & Al Puchala

Since its publication in 2012, Arthur Herman’s “Freedom’s Forge” has become essential reading in defense circles. Within a community suddenly under intense pressure to expand capacity against escalating global threats, it offers hope that we’ve been here before and prevailed. The book brilliantly captures how America’s peacetime economy transformed into the Arsenal of Democracy during World War II, guided by leaders like William Knudsen – former president of General Motors who became Roosevelt’s production chief. Those lessons about leadership, commitment, and industrial capacity from 80 years ago remain invaluable and should inspire us in facing contemporary challenges. Yet inspiration alone isn’t enough. Pentagon readers of Herman’s book must now consider what a modern equivalent actually requires.

The economy Knudsen navigated has fundamentally transformed. Where he worked with major banks and major corporations allocating capital, today’s landscape features far more complex and distributed markets. Federal and municipal debt markets now exceed trillions, augmented by over $50 trillion in private sector capital markets – including publicly traded securities, private equity, credit funds, and other managed assets. Private sector financial intermediaries beyond traditional banks now determine who gains access to resources, what gets built, through which supply chains, and how quickly. This evolution doesn’t diminish Knudsen’s wisdom; it demands we adapt his principles to modern financial realities.

Knudsen’s Insight, Today’s Opportunity

In 1940, Knudsen delivered a crucial message to President Roosevelt: companies needed firm government purchase commitments before banks would finance factory retooling. Without bankable assurances, production would lag. With clear guarantees, production could reach war-winning scale. Pages 92-3 of Freedom’s Forge capture this pivotal moment:

“The government can’t do it all,” Knudsen told Roosevelt…[and]…insisted that a “letter of intent,” meaning an official War or Navy Department letter stating the government’s intention to do business with a particular firm before a formal contract was drawn up and signed, should be enough to get a company advance funds from their bank…Knudsen sensed that the time for slow, deliberate action was over.

Roosevelt was deeply dubious. He pointed out that never in the history of the United States had such a provision been made for government contractors. Knudsen replied that it was time to shatter precedent. Otherwise, he said, they might never get a job of that size done in time. Roosevelt’s 50,000 planes a year would remain only a pipe dream, while Hitler’s Luftwaffe ruled the skies over Europe.

With Stimson firmly backing Knudsen, the White House at last conceded.”

Knudsen’s core principle holds true: industry cannot build at scale without reliable, long-term, financeable demand signals. However, the financial ecosystem has undergone a fundamental change. Where Knudsen coordinated with major banks and corporate leaders, today’s defense industrial base must attract capital from stock and bond markets, derivatives traders, institutional investors, private equity firms, family offices, foundations, credit funds, and venture capitalists.

This presents both challenge and opportunity. The challenge: traditional defense procurement – with annual appropriations, continuing resolutions, and termination-for-convenience clauses – doesn’t align with how modern capital flows. The opportunity: America’s capital markets, properly engaged, represent resources that could transform our defense industrial capacity.

The Scale of Possibility

America’s private capital markets represent unparalleled resources: publicly traded securities exceeding $50 trillion, private equity funds managing $7 trillion, venture capital deploying hundreds of billions annually, plus institutional investors with multi-trillion dollar portfolios. This capital seeks risk-adjusted returns through disciplined investment processes, pricing risk transparently and responding to clear market signals.

The urgency crystallizes when examining our competition. At a June 2025 defense conference, Dr. Jason Rathje, then-Director of the Office of Strategic Capital (OSC) – the Pentagon’s office created to leverage private capital for defense priorities – revealed a sobering metric. Throughout his tenure, he tracked Chinese subsidy programs launched since OSC received its first congressional funding. The comparison was stark: while OSC reached roughly $5 billion in lending capacity, China deployed $255 billion across manufacturing loan and fund programs targeting semiconductors and other critical technologies. When OSC launched a $1 billion manufacturing finance program at 6% interest, China responded within two weeks with a $70 billion program at 2%.

But here’s what matters: China’s model depends on state-directed capital allocation, while America’s strength lies in efficient private markets. We need not match their government spending dollar for dollar. Our advantage isn’t just scale – it’s the sophistication of our capital markets and their ability to efficiently allocate resources when given proper incentives. The question is whether we’ll create those conditions.

Making the Case: The 2% Solution

For institutional investors, supporting defense isn’t charity – it’s portfolio protection. A major conflict would devastate global markets, erase trillions in value, and destroy the supply chains every investment depends upon. This threat is not theoretical or distant – by multiple measures, global security risks stand at their highest point since the Cold War. As JPMorgan Chase CEO Jamie Dimon cautioned in his 2024 shareholder letter: “The brutal invasion of Ukraine and the indescribable terrorist acts on Israel should have dispelled any illusion that the world is a safe place.”

We do not need another Pearl Harbor or 9/11 to shatter any false sense of security based on the hopeful notion that dictators, terrorists and oppressive nations won’t use their economic and military powers to advance their aims – particularly against what they perceive as weak, incompetent and disorganized Western democracies.” Ray Dalio, founder of Bridgewater Associates, warned in 2024 that “we are seeing a classic breakdown of the major monetary, political, and geopolitical orders. This sort of breakdown occurs only about once in a lifetime.” Meanwhile, Admiral Philip Davidson, then–Indo-Pacific Commander, testified to Congress in March 2021 that China posed a threat to Taiwan, stating: “I think the threat is manifest during this decade, in fact in the next six years.”

For investors who may not fully grasp the proximity of these dangers, the message is clear: the geopolitical risk premium has never been more real in the modern era.

Modest allocation toward strengthening deterrence represents prudent risk management. Consider this benchmark: NATO allies commit 2% of GDP to defense. What if institutional investors allocated just 2% of portfolios toward defense and critical manufacturing? On a $50 trillion base, that mobilizes over $1 trillion – transformative resources for production capacity, innovation, and supply chain resilience. This isn’t about patriotism alone but preserving the stable, open markets that generate all returns. Economic deterrence through industrial strength prevents conflicts before they start.

Building Bridges to Capital

To attract modern capital today, defense contracts need features investors can underwrite:

• Multi-year commitments transcending budget cycles
• Clear termination provisions that define and limit risk
• Assignable contracts that can secure financing
• Predictable payment schedules ensuring steady cash flow

These aren’t exotic requests – they’re standard in commercial markets that finance everything from data centers to pharmaceutical plants. Incorporating them into defense contracting would unlock enormous private investment.

We’re already seeing proof points. For several years, venture capitalists have been backing defense start-ups, although the aggregate dollars in the venture sector, by their nature, are smaller than those in private equity and asset-based capital markets. Encouragingly, the US Navy’s partnership with the United Submarine Alliance Fund in Mobile, Alabama, attracted private equity through an Opportunity Zone fund structure to expand nuclear submarine production. And earlier this year, the DOD invested in MP Materials to support the domestic rare earths sector in addition to providing the company with long-term and predictable contractual production offtake.

But these remain exceptions when they should be the rule. These recent examples of DOD-led investments share two important features that should permit this emerging public-private partnership model to scale for national security.

• First, it involves a direct investment, either into a company or a fund with portfolio companies that attracts other private investors, that clearly offers a demand signal evidencing importance to the DOD. 
• Second, it involves a commitment or expectation that the investment will produce revenues to produce a fair risk-reward weighted financial return, either through product off-take commitments at close, or leases that will be written with tenants backed by the DOD.

A Partnership for Security

To defense leaders: Your commitment to strengthening our industrial base is vital. Success requires recognizing that today’s arsenal will be financed through private capital markets requiring appropriate structures and incentives. This isn’t a limitation – it’s an opportunity to access resources beyond anything previous generations imagined.

To investors: Your role in national security is real and immediate. The allocation decisions you make today shape America’s capacity to deter aggression tomorrow. This isn’t a side consideration – it’s central to protecting the entire system that generates returns.

To policymakers: Focus on creating bankable demand signals that markets can understand and underwrite. We don’t need new government lending facilities; we have the world’s best private capital markets. We need procurement approaches that speak their language.

To Congress in the oversight role: Embrace new tools for oversight that don’t involve a spigot that turns on and off each year. Begin to understand how hard “deals” are scrubbed by investors before they commit capital; new tech and innovation’s risk calculations are fundamentally different than infrastructure or scaling a proven technology.

The Path Forward

Herman’s “Freedom’s Forge” teaches us that with clear commitment by federal policymakers and the right incentives, American enterprise can achieve extraordinary outcomes. The participants in the defense industrial base of 2025 operate through capital markets – that’s where the resources, innovation, and speed exist – and that’s where the change must be forged.

The principles Knudsen championed – bankable commitments, clear demand signals, partnership between government and industry – remain our superpower and north star. But the implementation must reflect today’s financial reality. When we align defense needs with how private capital actually flows, we’ll build the modern Arsenal of Democracy.

The stakes couldn’t be higher. But so is the opportunity. With $50+ trillion in private capital and the world’s most innovative financial markets, America has every advantage – if we’re willing to adapt and engage. The return on this investment isn’t just financial. It’s the preservation of peace through strength, and the protection of the free markets that underpin global prosperity. The time for slow, deliberate action, in Knudsen’s words, is over.

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General Tim Ray, USAF (Ret.) is the former Commander of Air Force Global Strike Command, who today serves as the President and CEO of Business Executives for National Security.

Al Puchala is the Chief Executive Officer at CapZone Impact Investments LLC and a member of Business Executives for National Security.

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Disclaimers: As CEO of CapZone Impact Investments LLC, Mr. Puchala maintains a material financial stake in the USA Fund. This disclosure is provided for purposes of transparency and potential conflict-of-interest considerations.

This article, originally titled Freedom’s Forge 2.0, was developed independently of, and without involvement from, author Arthur Herman.

Digital artwork created with the assistance of ChatGPT (OpenAI)