While Treasury Inflation-Protected Securities (TIPS) were first auctioned in 1997, the concept of inflation indexed bonds dates back to the founding of America itself. The Commonwealth of Massachusetts issued the first known inflation-indexed bonds in 1780, during the Revolutionary War. At the time they were issued, the spirits of American troops were low due to a lack of food, clothing, and pay. Robert Shiller wrote:
“There was real concern in 1779 that it would be impossible to keep an army if something were not done to address the loss of value of their pay. The invention of indexed bonds came in response to this very real and dangerous crisis.”
The inflation-indexed bonds were issued to soldiers as a method of “deferred compensation” for their service. To protect against a loss of purchasing power via inflation, the bond payments were tied to a consumer price index.
Read More: Inflated Fears