Financial Management in the Cold War US Military

Under pressure to cut costs after World War II, leaders in the new U.S. Department of Defense recruited managers from private industry to help them run the Cold War national security state. As a logistics officer later recalled in a lecture at the Army’s management school, the period around the Korean War marked the beginning of a new, business-minded era in the Army where dollars and not tons of bombs became the main unit of account. This paper examines how defense officials made the military legible in business management terms. Some cost-reducing reformers concluded that the best way to tame the military bureaucracy was to simulate markets within it in by setting up “revolving funds.” This involved making managers at all echelons account for materials, weapons systems, and labor in dollar terms and setting up “buyer-seller” and competitive relationships between certain military activities.

Revolving funds were widely introduced in 1949 at a time of active, enthusiastic reform of the military establishment on the model of business. I explain the ideas about structuring incentives for managers that the first generation of reformers used to promote revolving funds and go on to share some cases of what market simulation meant on the ground. The following decade saw an expansion in the use of revolving funds as economic reasoning gained prominence in the Defense Department. Drawing on neoclassical economics, a new generation of reformers saw revolving funds not just as a behavioral tool that would promote cost consciousness in local mangers, but an attractive way to structure the entire defense establishment based on the allocative efficiency of markets. While this dream would remain unfulfilled, proponents of revolving funds legitimated the calls of free-market advocates for privatizing many of the historical functions of the defense establishment.