The Origins of the Challenge Coin in the USA
The following excerpt is courtesy of Wikipedia
While many organizations and services claim to have been the originators of the challenge coin, the most commonly held view is that the tradition began in the US Army Air Service (now the US Air Force) during WWI.
Air warfare was new during WWI when the Army created flying squadrons manned with volunteer pilots. While some of the early pilots came from working class or rural backgrounds, many were wealthy Ivy League students who withdrew from classes in the middle of the year, drawn by the adventure and romance of the new form of warfare.
As the legend goes, one Ivy Leaguer, a wealthy Lieutenant, ordered small, solid bronze medallions (or coins) which he presented to pilots in his squadron as a memento of their service together. The coin was gold-plated, bore the squadron’s insignia and was quite valuable. One of the pilots in the squadron, who had never owned anything like the coin, placed it in a leather pouch he wore around his neck for safekeeping. A short while later, the pilot’s aircraft was heavily damaged by ground fire, forcing him to land behind enemy lines where he was captured by the Germans. The Germans confiscated the personal belongings from his pockets, but they didn’t catch the leather pouch around his neck. On his way to a prisoner of war facility, he was held overnight. During the night, he escaped. The pilot avoided German patrols by donning civilian clothing, but all of his identification had been confiscated so he had no way to prove his identify.
He finally made contact with a French patrol; but the French didn’t believe who he said he was because there were many German saboteurs dressed in civilian clothes as disguise. The French mistook the American pilot for a German saboteur and immediately prepared to execute him.
Desperate to prove his allegiance and without any identification, the pilot pulled out the coin from his leather pouch and showed it to his French captors. One of the Frenchmen recognized the unit insignia on the coin and delayed the execution long enough to confirm the pilot’s identify.
Once the pilot safely returned to his squadron, it became a tradition for all members to carry their coin at all times. To ensure compliance, the pilots would challenge each other to produce the coin. If the challenged couldn’t produce the coin, he was required to buy a drink of choice for the challenger. If he could produce the coin, the challenger would purchase the drink.
The tradition spread to other squadrons and other military units in all branches of service. Today, challenge coins are given to members upon joining an organization, as an award to improve morale and sold to commemorate special occasions.