Here's what I know so far: Until 1912, there was no precise definition of the American flag, with the layout of the stars and exact dimensions of the components not officially defined. This changed with executive order 1637, which specified exact dimensions. The exact dimensions appear to have been supplied by the navy.
Most of the dimensions they supply are fairly self-explanaotory. The canton is 7 stripes tall, and 2/5 of the width of the flag, for example. Each star has an equal sized margin around it. But there's no obvious reason behind the diameter of the stars. This page on wikipedia says that it's 1/(10 * phi) the height of the flag, but there's no source or justification given, and the math doesn't quite work out.
This page has some correspondence between the Joint Army and Navy board and Taft, but doesn't shed any light on the star diameter.
Why is the diameter of the stars defined how it is?