In this country rediscounting has never been a feature of banking practice to any such extent as in Europe. Indeed it has generally been looked upon as bad banking and an evidence of weakness on the part of banks resorting to it. Country banks, especially in the South, have resorted to some extent to their depository banks in the large cities for accommodation either by way of rediscount or of loans on bills receivable or securities, but such dealings constitute a very small proportion of the total amount of loans and discounts. In Europe, on the contrary, rediscounting is universal and constitutes an important part of the business of the great central banks, especially those of France and Germany.
One reason for the contrast between American and European practice is found in the fact that in this country the single-name promissory note has become the familiar commercial instrument, while the bill of exchange is used abroad. When a customer's note is discounted at the bank it is practically a "dead" asset, that is, it cannot be converted into cash before maturity. It is quite different with bills of exchange or acceptances as used in Europe. These bills, drawn by a customer upon his bank and accepted by the latter, become salable anywhere and are freely discounted in the open market. They pass from one lender to another, thus acquiring additional indorsements, and eventually find their way into one of the principal banks. The Bank of France in Paris and the Reichsbank in Berlin rediscount large volumes of these bills, partly as a matter of collection and transfer of funds, but also for the purpose of accommodating other banks with cash.
Under the construction of the national bank law national banks have not been permitted to accept time drafts, and the Federal Reserve Act does not lift the prohibition except for bills based upon foreign trade. The basic reason for the absence of rediscounting from our banking practice heretofore has been the lack of any central banking power holding available for the use of other banks a portion of the general reserve funds of the country. The Federal Reserve Act will in part cure this defect by providing for the pooling of a portion of the banking reserves of all member banks in a dozen regional banks in different sections of the country, where member banks finding it necessary to convert some of their assets into cash may do so by rediscounting good commercial or agricultural paper as defined in the Act.