The Bloomfield mission to South Korea

Interesting paper by Michele Alacevich and Pier Francesco Asso, Universita di Palermo, 'Money Doctoring After World War II: Arthur I. Bloomfield and the Federal Reserve Missions to South Korea'

Bloomfield and Jensen began their Korean mission in August 1949. Bloomfield left the country in March 1950, while Jensen remained to see the new South Korean Central Bank – the Bank of Korea – opening for business on June 12. Bloomfield and Jensen had drafted the institution’s statute.

Their primary purpose had been that of converting the Bank of Chosun – the former Korean central banking institution under the Japanese occupation – “into a more genuine central bank” (Bloomfield and Jensen 1951: 43). Although, in fact, the Bank of Chosun had had the monopoly of the note issuing privilege, and had performed such other typical central bank functions as having privileged relations with the government and holding reserves for other banks, it had never been able to control the supply of money and credit, “the basic role of a central bank” (Bloomfield and Jensen 1951: 43). A fundamental subservience to the political authority, together with the carrying out of commercial banking in competition with other private banks, had weakened its position in the system. As a consequence, two related purposes of the Bloomfield mission were those (i) of gradually releasing the central bank from a direct governmental control through the establishment of a Monetary Board and (ii) of re-founding it as a completely new institution with no direct link with the politically weak Bank of Chosun.

Most powers were concentrated within the Monetary Board which was the principal body of government of the institution and the most important innovation with respect to the Bank of Chosun. The Monetary Board was a representative body of the various economic interests in the country and had direct responsibilities in the elaboration and execution of the new Bank’s policies. As Bloomfield and Jensen put it: “a central bank is much too strategic and vital a factor in a country’s financial and economic welfare to be guided by any one man or any narrow group, no matter how well intentioned, and we firmly believe that the establishment of a Monetary Board will go a long way towards democratizing the Bank and its policies, reducing the possibility of unwarranted and arbitrary political pressures and interferences” (Bloomfield and Jensen 1951: 44). The Act Establishing the Bank of Korea (henceforth AEBOK) devoted many articles to the definition of its role and powers. The Monetary Board – as stated in Article 7 – “shall […] formulate monetary, credit, and exchange policies and shall be responsible for the general direction and supervision of the operations, management and administration of the Bank”, for which it bore a collective responsibility (Art. 21). The Board’s supremacy appears evident when confronted with the powers and duties of the Governor of the Bank, which were limited “to administer and direct the operations and internal affairs of the Bank in accordance with the policies approved by the Monetary Board” (Art. 24). Thus, the Governor maintained a merely operative role, while the formulation of strategies pertained totally to the Board. Consequently, Bloomfield and Jensen organized the Bank’s internal departments as directly subordinated to the Board. They provided that the Research Department assisted the Board with all the information necessary for the formulation and execution of its policies, de facto completely by-passing the Governor . Similarly, the Supervision and Examination Department – which controlled the activities of the national banking system – was “subject to the instructions of the Monetary Board” (Art. 28). Once again, the Governor did not have any control on, or relation with, this strategic department .

As to the Monetary Board’s composition, the two American advisers granted ample recognition to the actual role of the country’s political government in Korea’s economic life. Since it would have been unrealistic to design a completely independent Monetary Board, a lot of work was done to shape a realistically balanced governing body. As a consequence, of seven members of the Board, four were government appointees: “especially in an economy so heavily dominated by the Government as present-day Korea […], it was rather difficult, in deciding members of the Board, to locate segments of the economy that were completely freed of Government control” (Bloomfield and Jensen 1951: 45) .

Thus, the achievement of a complete central bank independence from the government’s influence proved to be a very difficult task. In principle, this independence should pass through the strict limitation of the central bank’s loans to the government to just temporary advances to cover short-term gaps between government’s expenditures and revenues. The central bank financing of the public deficit, in fact, would have had an inflationary impact, adding resources to the total amount of the purchasing power in the hands of the public. On the contrary, the government and other public agencies had always directly borrowed from the Bank of Chosun, and this pattern would remain active also with the new Bank of Korea. Bloomfield and Jensen were aware that a mere statutory prohibition of such practices would risk remaining practically ineffective. Bloomfield and Jensen proposed a more limited approach which provided that the aggregate public indebtedness should be authorised by the National Assembly (that is the democratically elected legislative power), and that such a ceiling could not be overcome by the government (AEBOK, Art. 83) . In the meanwhile, they pointed out the means through which government’s borrowing could be reduced over time: enhancing the balance between expenditures and revenues – reducing the former and raising taxes as well as their enforcement – and strengthening budgetary accounting controls. Furthermore, the huge inflationary spiral which affected the Korean economy prevented the central bank from financing long-term recovery and development projects. “At the present moment” – Bloomfield and Jensen held – “everything must be done to discourage further long-term lending until the budgetary situation is normalized” (Bloomfield and Jensen 1951: 50). As to the more general issue of Central Bank advances to the government, even long-term lending was not legally forbidden in the central bank’s statute, but was put under a stricter legislative control.