Before 1914 one of the serious defects in the American banking system was the want of a discount market - a dependable source of funds for the banks at all times, on the basis of commercial paper. The federal reserve banks provide by the rediscount process such a source for the member banks, who are thus no longer dependent upon their correspondents for accommodation.

Until June, 1917, however, the member banks had made relatively little use of the rediscount privilege. The operation was novel to most members and the inertia of custom was enough to keep them from using the federal reserve banks as a source of funds. There was also a sentiment adverse to rediscounting, for to rediscount the paper of customers was thought to reflect discredit upon a bank's management and this unwarrantable sentimental objection had to be smoothed away. The wide-spread skepticism of country banks about the federal reserve system, the general attitude of waiting to see what it would do, and the ignorance of the banking fraternity concerning the new system, were also contributory factors toward delaying rediscounts. Finally, there was a dearth of eligible paper in the portfolios of the members.

These various obstacles in the way of rediscounting were lessened by a campaign of education about the new system, by the development of acceptances as a commercial instrument, by the cumulative experience of members with the reserve banks, and by the admission of many state banks to the reserve system.