DEFINITION of Service Certificates
Service certificates are bond-like certificates that promised payments at maturity date to World War I (WWI) veterans. Service certificates were granted to WWI veterans under the Adjusted Service Certificate Law in 1924, which promised "bonus" payments to eligible soldiers redeemable in 1945.
These certificates are formally known as Adjusted Service Certificates.
BREAKING DOWN Service Certificates
The service certificates were issued to World War I veterans as a life insurance benefit. Service certificates had a face value like a bond and the promised payment at maturity included compound interest. Their face values were calculated by length of service and then increased by 25%.
The long-term maturity date of these service certificates presented problems for holders and the U.S. government. In the 1930s, in the midst of the Great Depression, war veterans were in desperate need of funds and tried to demand immediate cash payment of the service certificates. A group of 17,000 war veterans and their families, known as the "Bonus' Army", marched to Washington D.C. to try to persuade Congress to move up the date of maturity of the certificates. This 1932 march initially failed to get Congress to speed up the payments, but in 1936, Congress passed a bill allowing veterans to collect the service certificate payment.
The 1936 Adjusted Compensation Payment Act provided for the immediate payment of the face value of service certificates minus outstanding loans and unpaid interest. The Act replaced the service certificates with non-negotiable but immediately redeemable service bonds issued by the Treasury Department in denominations of $50, with odd amounts between 50-dollar multiples paid by check. For example, if a veteran was to receive $1,172 on his service certificate, he was paid 23 $50 service bonds and written a check for the $22 difference. These bonds are formally referred to as Adjusted Service Bonds.
The bonus baby bonds paid interest at an annual rate of 3% from 1936 to 1945, higher than the 2.5% interest rates on savings accounts. Although the service bonds could not be sold, they could be redeemed with the Treasury for cash at any time after June 15, 1936. While the veterans had the option of holding the bonds until their maturity date in 1945, most veterans cashed in almost immediately – 39% in the first 15 days, 61% in the first 45 days, and 75% in the first year. The cash payments constituted an efficient economic stimulus – since the program required little government administration, the money paid to veterans was likely to be spent without delay, and the entire process did not require the long lead time of a public works program.