Banks and other depository institutions traditionally have borrowed from the Federal Reserve's discount window when they face a temporary, unexpected, need for funds. Historically, the Federal Reserve lent "adjustment credit" to meet such needs.

Reserve Banks relied on two basic principles in administering adjustment credit:

Banks and others saw the Federal Reserve's administration of adjustment credit as a burden and as varying in consistency. Also, institutions that borrowed adjustment credit to meet routine, short-term, needs expressed concern that banking supervisors and others might see borrowing as a sign of financial weakness. These factors contributed to the notion of a "stigma" associated with borrowing from the discount window. That stigma deterred some institutions from using adjustment credit when doing so would have been appropriate.

The primary credit program, in contrast, minimizes the administration of and restrictions on the use of discount window credit. Moreover, only generally sound institutions are eligible to borrow primary credit, so borrowing primary credit should not be seen a sign of financial weakness. Thus, the primary credit program should reduce depository institutions' reluctance to borrow, thereby making the discount window a more effective policy instrument.