(FORTUNE Magazine) – There aren't a lot of innovations in the field of government securities, and nearly all recent ones--like futures, derivatives, and zero-coupon bonds--have been invented in the private sector rather than in Washington. So the Treasury Department's proclamation in May that it plans to issue inflation-indexed bonds--an entirely new kind of security for the U.S.--qualifies as a very big deal. Until then, inflation-indexed bonds had always seemed like one of those great ideas that were beloved of economists but would never fly in Washington, like the notion of a staunchly nonprotectionist trade policy.

Why do we need inflation-proof bonds? First, a bit of history. One of the remarkable facts about the American economy is that at the onset of World War II, a dollar still bought about as much as it had when the Constitution was ratified. Over the decades, prices rose in some periods (inflation) and fell in others (deflation), but there had been no cumulative inflation over time. Inflation became endemic after the war but was mild--less than 3% in most years. Investors confidently bought long-term bonds from the government and corporations with little fear that they might be repaid with dollars that had lost value because of an uncontrolled rise in the price level. Then came what some economists call the "Great Inflation" of the 1970s, and with it, the destruction of huge swaths of bondholders' wealth. One consequence: Despite the Federal Reserve's successful 15-year war on inflation, investors still demand higher rates on long-term bonds, partly to ensure against the chance of a future inflation outbreak.

Inflation-indexed bonds could repair a lot of the damage. Advantages are obvious for investors. Nearly all financial plans call for some part of a portfolio to be invested in "safe" assets. Treasury securities, backed by the full faith and credit of the U.S. government and among the most liquid securities in the world, come closest to filling the bill today. Indexed for inflation, Treasury bonds would be near perfect. "For the first time," says Deputy Treasury Secretary Lawrence H. Summers, "the capital markets will be offering something that's safe in terms of purchasing power, which is what people should ultimately care about."

Indexed bonds will also promote good public policy, because they reduce the political incentive to inflate. During inflations, the government services and redeems its debt with ever cheaper dollars, leaving it more to spend on other things. No one made out more like a bandit in the 1970s than the U.S. Treasury. The greater the proportion of inflation-indexed bonds, the less profitable that game becomes.

There's another policy benefit--technical but important. By issuing indexed bonds and traditional nonindexed bonds that are otherwise identical, monetary policymakers can compare the prices at which the two securities trade to get a quantitative reading of inflationary expectations--something that can only be guessed at today. If rates on the nonindexed bonds rise and rates on indexed bonds don't, for example, the market is betting inflation will take off.

Opposition to indexed bonds in the past has come from Wall Street, where traders like the kinds of securities that turn over fast, not the kind that are socked away in long-term portfolios. That's why Robert Rubin, the current Treasury Secretary, is the right guy to close this deal. Having fought your way from the ground-floor level to the executive suite at Goldman Sachs is perfect preparation for telling a bunch of self-absorbed bond traders where to get off the train.

The other essential facilitator at Treasury is Deputy Secretary Summers. The intellectual cleanup hitter at Harvard's economics department before he got Potomac fever, Summers was a tenured professor at age 28 and is all of 41 today. He likes nothing better than bending other people's minds to his own viewpoint. Credit him with deciding that inflation-indexed bonds were important, then credit him with selling the idea to Rubin.

That the Clinton Treasury plans to put into practice an idea long favored not only by liberal economists but also by conservatives like Milton Friedman says something larger about the field of economics. Although they squabble endlessly about policy issues like taxes and income distribution, economists really agree on most questions about how markets work. Inflation-adjusted bonds are an example of an area where the consensus is very broad. Says Summers: "The fact that the decision has been made to do this now illustrates the ultimate power of good ideas."

REPORTER ASSOCIATE Lixandra Urresta