There's No Such Thing as a Free Lunch

The introduction of provisions into long-term contracts designed to allow for possible changes in the general level of prices is a very old practice. Already in the sixteenth century ( 1576) the English Parliament decreed that colleges that granted long-term leases on land they owned had to specify that at least one-third of the rent would be paid in grain or the monetary equivalent thereof. This "purchasing power" provision was the salvation of the colleges. A century or two later the "real" part of the rent was essentially the whole of the rent, the rest having been rendered nearly worthless by inflation.

Similarly, proposals for the widespread use of such clauses to mitigate the evils of inflation date back over a century and a half and have been endorsed by many eminent economists as I point out in the final item in this chapter, "Using Escalators to Help Fight Inflation" ( July, 1974). In that article, I urge the widespread use of such clauses primarily as a means of reducing the transitional costs of ending inflation. However, the inclusion of such clauses in governmental tax and borrowing arrangements is called for equally by simple considerations of equity and representative government. I was myself converted to the government issuance of purchasing power securities on a day in 1942 or 1943 when, as an employee of the U.S. Treasury Department, I was asked to draft a speech for a high Treasury official urging the public to buy U.S. government savings bonds. I found that it was impossible to draft a speech suitable for the purpose that was both comprehensive and honest.

Although I have long favored the widespread use of escalator clauses,

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