Some librarians just didn't stock long series of books, because of the expense and shelf space. Others unfairly linked Baum with poor writing, or didn't like some of the messages conveyed in the books. Some even thought that fantasy was bad for children to read. And it didn't help that Reilly and Lee was not a big publishing house, able to generate enough publicity and interest for libraries to want to carry them. (Most of the recommended reading lists that libraries used to select books were compiled by the big publishing houses, who ignored the Oz books because they didn't publish them.)Recently, The Baum Bugle editor in chief and Oz bibliophile Craig Noble mentioned that he wasn't sure about the supposed lack of Oz books in libraries given how many library binding editions of the Oz books he'd found.
While this does raise an interesting point, I think I've found an explanation.
The library binding editions seem to date after the 1960s, when Reilly & Lee were bought up by a bigger publishing company, Henry Regnery (later Contemporary Books, now part of McGraw-Hill). More specifically, these were the Rand-McNally paperback versions of the "White Editions" rebound.
A library binding was usually not as ornate as the mass market editions. These were bound on usually thicker and more sturdy boards that would stand up to heavier use. They'd have minimal or simplified printing or stamping designs on the covers and also usually didn't have a dustjacket. In more recent years, this has been abandoned and libraries stock mass market editions.
I haven't personally seen any of the library editions, but the ones I've seen pictures of from collectors who pick them up seem to be rebound versions of the famous "White Editions" from the 1960s and 1970s. These editions reworked the layouts of the original editions into new, uniformly elaborate editions that were also wholly in black and white inside. Since prior editions used colored cloths in binding and these used white cover boards with color printing on them, they were nicknamed "White Editions" by fans and collectors.
Given Eric's statement, and the fact that most library editions I've seen pictured seem to be based on the White Editions, I'd guess that unlike before, being part of a bigger publisher, the Oz books could now be printed in big enough numbers to offer library editions and be available to libraries at reasonable costs.
This was about the same time that the earliest generations of Oz fans were now able to write their own respectable opinions on why the Oz books were worthy literature, so the timing couldn't have been better!
I'm working on a good bit of speculation here, though, so if you think I'm missing a point here or missing some other factors or am totally off the mark, go ahead and leave a comment!
EDIT: Well, less than an hour later, Craig contacted me about library editions, including showing several of his own library editions of Thompson titles which were not part of the White Editions line and were available for sale. So while Henry Regnery may have helped in production numbers, Reilly & Lee were producing such editions before they became part of that company.
EDIT: Further comments reveal that library binding versions date back to the 1920s. The refusal to stock Oz books in libraries was not universal, but the cases where they were refused got a lot of attention!