I'm at MIT proper and a good portion of our team's medical device work is DOD funded. While we are primarily designing devices to be used in civilian hospitals, our diagnostic devices could also potentially be used to optimize battlefield care for soldiers, which I personally think is great.
I think a wholesale ban on military research is pretty silly; the ethical implications of projects should be considered on a case by case basis by the university.
As someone who wasn't alive then either, it's a rather well documented period of history, albeit mostly in dead tree form. Karnow is probably the classic (http://www.amazon.com/gp/aw/d/0140265473/).
To use a more modern analogy that exists on the internet, the 2010 US military research / development / testing budget looks like it was around USD$80b.
Now you're a university professor / dean / president. Times are hard (they always are, you're in academia). There's a huge pie sitting right next to the one you've been fighting over, and all you have to do is work on certain technologies that may or may not have lethal consequences.
I wouldn't take the bet on many people saying "No thanks, I'll be happy giving up grant money for moral reasons."
So, you move it off-campus. See e.g. the MIT Lincoln Lab, https://www.ll.mit.edu/