USS Yorktown at sea

Defense and Inflation: From Roosevelt to 2023

The world is entering a year of increased defense spending as countries prepare their armed forces for spontaneous threats while developing long-term military doctrines that respond to new technologies and shifting alliances. Washington will need to develop a sustainable model for reinforcing its defenses in a domestic and international environment marked by persistent inflation, obstacles to multilateral dialogue, and pushback from reticent policymakers.

In 1929, global markets plunged into the decade-long Great Depression that engendered devastating unemployment, crippled key industries like construction and agriculture, and overwhelmed consumers with unsustainable levels of debt. Despite the unfavorable economic circumstances of the time, U.S. President Franklin D. Roosevelt allocated $238 million (approximately $642 million today) to the construction of 32 naval vessels as a part of the 1933 National Industrial Recovery Act (NIRA). The USS Yorktown and USS Enterprise, two aircraft carriers that proved essential to American victory over the Japanese during the pivotal Battle of Midway about a decade later, were commissioned alongside the vessels.

Roosevelt did not originally intend to include this naval resurgence in the NIRA because, at the beginning of his first term, he was relentlessly focused on the welfare programs within his New Deal legislation. With a significant portion of the American population unable to find work, Roosevelt’s agenda was consumed by domestic challenges. Force projection seemed like a wasteful venture at the start of the 1930s.

Nevertheless, the Navy refused to drift into obscurity. Its leadership called upon Carl Vinson, whose five decades in the U.S. House of Representatives significantly contributed to the expansion of the U.S. Navy during the Cold War, to lead a public opinion campaign to convince the Roosevelt administration that building over 30 vessels aligned with the NIRA’s objective. Making its case during a catastrophic time for the construction and manufacturing industries, the Navy League—formed in 1902 under Theodore Roosevelt—placed considerable emphasis on the materials that funnel into shipbuilding. As a result, it won over leaders previously hesitant to increase spending in the midst of a major depression.

Roosevelt’s NIRA was widely regarded as a failure at the time because of the overbearing influence of the business lobby, but the naval expansion that fell under the act escaped this criticism. It was, in fact, one of the best long-term investments the U.S. could have made. Bernard Brodie, a military strategist who played a key role in devising nuclear deterrence theory, stressed the monumental importance of the NIRA’s attention to the Navy in a piece composed for the Yale Institute of International Studies. “With this act we have the first instance in American history—and probably world history as well—of military expenditures being deliberately manipulated to secure contra-cyclical effects,” he wrote.

In other words, the naval expansion seemed to ignore the poor business cycle that marked the Great Depression. This was one of the only sections of the NIRA that did not allocate money to a social program, labor protection initiative, or national association that would last beyond Roosevelt’s term. Its objective was tangible: the production of physical capital. The Navy had a proposal for the materials and funds required for the construction of each ship, and as soon as the act was approved, it was a matter of executing the blueprint presented to Congress.

The process created jobs for unemployed Americans, was unobstructed by lobbies, and maximized the value of each dollar that went towards building the ships. For “an administration dedicated to spending its way out of depression… the [naval] commodities purchased were to prove more precious per dollar spent than almost any others acquired under ‘relief spending,’” Brodie explained in 1950, when the ships’ triumphant performance during WWII was still fresh on Americans’ minds.

Investing in capital that will remain relevant for national security in subsequent decades is a strategy that has shown its merit in American history. While taxpayers are often quick to blame military expenditure as the source of their financial troubles, long-term investment in American defense can be a source of remarkable stability during a time of economic uncertainty. Social programs, on the contrary, are high-risk, high-reward. Roosevelt’s New Deal exemplified this difference. The National Recovery Administration, assembled under the NIRA, failed to last two years, while other New Deal initiatives like the Social Security Act have stood the test of time.

Although today’s ubiquitous inflation hangs over Washington’s head every time it spends more on defense or sends aid abroad, it should not act as an obstacle to either of these pursuits. The $32.6 billion set aside by the FY 2023 National Defense Authorization Act (NDAA) to expand and modernize the U.S. naval fleet while supporting the Army’s procurement efforts is a safe investment even as the Federal Reserve continues to bump up interest rates. This is particularly true following China’s addition of a concept labeled Far Seas Protection to its 2015 Defense White Paper, which leaves the limits to the naval area it must patrol ambivalent.

As stated by the 2022 National Security Strategy, “trade with the Indo-Pacific supports more than three million American jobs and is the source of nearly $900 billion in foreign direct investment in the United States.” Consequently, it is indispensable for Washington to ensure that its defense spending is commensurable with the presence it desires in the Indo-Pacific, especially as Chinese military analysts have advocated for the People’s Liberation Army Navy to scale up its operations and project influence abroad.

Moreover, the NDAA’s funding for the sea-launched cruise missile nuclear development program, designed to extend American deterrence in such a way that the U.S. can respond to nuclear threats more quickly, is a safe bet considering the evolving doctrines of Washington’s principle adversaries. Last month, for example, Russian President Vladimir Putin suggested for the second time that Moscow could abandon its doctrine of no-first use, enabling it to “deprive the enemy of [its] control systems.” This is particularly unnerving considering that Russia’s nuclear doctrine already includes an ambiguous provision stating that any threat to national security is enough to provoke retaliation. China, for its part, is engaging in an unprecedented build-up of its nuclear warheads, while North Korea has ignored Western demands to halt its recurring tests. The U.S. and Iran have failed to make meaningful progress on restoring an agreement similar to the Joint Comprehensive Plan of Action as Tehran moves forward with its enrichment program.

The possibility that the world enters a multipolar nuclear era is increasingly likely. Thus, one of Washington’s most valuable investments in the coming decades will be the maintenance and modernization of its nuclear forces to demonstrate to its adversaries that it is not falling behind on key technologies. This will require effective spending, sound monetary policy, and synchronization between the defense and energy industries.

Another major challenge to increased defense spending is multinational cooperation. Interestingly, Asia has shown much more unity on this front compared to the European Union (EU), even if no country on the continent is a member of a military alliance comparable to NATO. Political leaders in Asia, from the recently elected president of the Philippines, Ferdinand Marcos Jr., to Indian Minister of External Affairs Subrahmanyam Jaishankar, are prioritizing the national interest as the cornerstone of their country’s foreign policy and are less constrained by organizations that bring together members with diverging interests. This makes it easier for them to avoid the disagreements that inevitably arise from multilateral dialogues.

Japan has committed to bolstering its defense budget by 26.3 percent in 2023. Deterring bellicose Chinese naval activities in the East China Sea, strengthening cooperation with contractors in the United States and Europe, and signaling its resolve against North Korea are all factors that have contributed to Japan’s assessment for the new fiscal year.

As it sends more aid to the Pacific Islands and monitors Chinese naval expansion to its north, Australia has announced a budget increase for the next cycle and aims to dedicate 2 percent of its GDP to defense by 2026. While not an Asian country, Australian affairs are inextricably tied to the future of the Indo-Pacific, which means that the effects of its defense spending will be most felt in Asia.

The EU, citing Russia’s invasion of Ukraine as the primary motivation for its greater attention to security, intends to earmark the equivalent of $74 billion to defense through 2025. Reaching a consensus on the necessity of additional expenses becomes more difficult when multiple countries are involved, however. European cooperation remains weak and marked by imbalance. For instance, although the Research & Technology allocated to defense in the EU shot up by 41 percent in 2021 compared to the previous year, France and Germany alone can be credited for over 80% of the expenditure.

The preponderant role that these two countries play in the EU makes their sharpening division all the more preoccupying. Within a few weeks of the crisis in Ukraine, French publications began sounding the alarm on the repercussions of Berlin’s military rearmament. “Germany has never imported French material and has always considered bilateral projects with skepticism,” a group of around 20 French defense experts wrote in La Tribune. Germany’s national interest rests in the success of its domestic industrial output. Therefore, it is satisfied with its “voluntary servitude” to American defense companies since this produces more profit than attempting to overcome “the difficulties of interoperability with French programs and systems,” the authors conclude.

French resistance to Berlin’s more active role in European defense was epitomized in November 2022 when it refused to join German Chancellor Olaf Scholz’s “European Sky Shield Initiative.” NATO has framed the project, which proposes to modernize anti-missile defense technology in Europe by drawing from American, Israeli, and German systems, as a “multinational and multifaceted approach” to boosting military readiness. However, its failure to bring together the EU’s two largest economies as German defense spending progressively rises to meet NATO’s 2 percent threshold is an inauspicious sign of future European financial and military unity.

In Asia, on the other hand, Chinese maritime expansion presents a common concern for countries that rely on the Indo-Pacific as a hub for commercial and technological influence. While Washington must be careful not to assume homogeneity in the outlook of every Asian state boosting its defenses, its goal must be to demonstrate to allies and non-aligned countries that its presence in the Indo-Pacific is conducive to free and fair commercial transactions that do not tilt the scale in favor of any one party. Washington ought to embrace Asian governments’ unwillingness to define themselves in terms of a Manichean contest between the U.S. and China, but would also benefit from active measures to influence each state’s calculation regarding how much rapprochement with the U.S. contributes to its national interest.

Enlarged military budgets are an indispensable means for the U.S. and its allies to respond to their adversaries’ sharpening capabilities. In 2022, China’s defense expenditure increased by 7.3 percent compared to the previous year and it has begun building a new fleet of submarines that will be deployed through the rest of the decade. While Russia’s conventional military forces have exuded incompetency during the invasion of Ukraine, Moscow recently equipped its new Zircon hypersonic cruise missiles to submarines in the Atlantic. North Korea’s disproportionately high defense budget also shows no signs of decreasing.

As Bernard Brodie quipped in his piece for Yale’s now extinct Institute of International Studies, “The lack is not so much of generals who understand economics as of economists and other civilian experts who understand the military problem and can talk with the generals in their own terms.” This type of dialogue allowed Franklin Roosevelt’s administration to include naval expansion in its NIRA even if the act was not originally intended to encompass military matters. The White House, the Pentagon, and the Federal Reserve should coordinate discussions with one another to ensure that the U.S.’ defense expenditure follows a sustainable model and can weather the effects of today’s extraordinary inflation.

Axel de Vernou is a research assistant at Yorktown Institute and a sophomore at Yale University where he studies Global Affairs and History.

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