The Invention of Inflation-Indexed Bonds in Early America

Abstract

The world's first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of their pay. Although the bonds were successful, the concept of indexed bonds was abandoned after the immediate extreme inflationary environment passed, and largely forgotten until the twentieth century. In 1780, the bonds were viewed as at best only an irregular expedient, since there was no formulated economic theory to justify indexation.

Keywords: indexation, inflation history, inflation-indexed securities, inflation-protected securities, index-linked gilts, tabular standard, United States, Massachusetts

JEL Classification: E31