[Viewpoint] The Enacted Bank of Korea Act Is a "Deep Root" and a "Deep Spring"

Professor Kim Hong-beom, Department of Economics, Gyeongsang National University

The Bank of Korea, which celebrated its 70th anniversary last June, now stands at a crossroads as the year ends. This is because the revision bills of the Bank of Korea Act and the Electronic Financial Transactions Act, which will have a significant impact on the Bank of Korea’s overall policies, are currently under review in the National Assembly. The proposed amendments to the Bank of Korea Act fall into two categories. One group seeks to add employment stability as a purpose of the Bank of Korea’s establishment, while the other proposes imposing a parliamentary confirmation hearing procedure on candidates nominated as members of the Monetary Policy Committee. Meanwhile, the amendment to the Electronic Financial Transactions Act includes provisions for the government (Financial Services Commission) to supervise digital payment transaction clearing businesses.

As an economist, my answer is clear. If these two laws are amended in the proposed directions, the Bank of Korea’s policy independence and credibility will suffer serious damage, and the national economy will pay a heavy price for a long time to come. Nevertheless, amid the prevailing trend of legislative excess, the current Bank of Korea Act and Electronic Financial Transactions Act amendments have arrived like a triple wave, and they seem somewhat ominous. In times of confusion, "history is always the supreme discipline." From this perspective, I recall the Bank of Korea Act enacted 70 years ago.

The Bank of Korea is the first modern central bank in our country. It is well known that the Bloomfield Mission (Bloomfield and Jensen, who were staff members of the U.S. Federal Reserve System) visited Korea for half a year in the fall of 1949 and laid the foundation for the Bank of Korea Act, the legal basis for the Bank. However, it was only revealed this June that the decision by the Truman administration in April 1948 to withdraw U.S. troops from Korea and provide Korean reconstruction aid was directly connected to the Bloomfield Mission’s visit and the drafting (technical support) of the Bank of Korea Act. In fact, the technical support from this mission was part of the inflation stabilization program carried out by the Economic Cooperation Administration (ECA) delegation, which was the reconstruction aid authority in Korea. This reflects how severe the inflationary vicious cycle was in Korea at that time.

The unprecedented inflation in the late 1940s was due to the Ministry of Finance’s control over the banking system and the extremely reckless lending to the government sector. Recognizing this, the Bloomfield Mission prioritized blocking the government’s undue influence over the financial system and securing the Bank of Korea’s policy independence by designing the Monetary Policy Committee. The mission concentrated broad policy authority and responsibility in a collegiate decision-making body (the Monetary Policy Committee) composed of multiple members representing "the diverse and extensive interests of the national economy." Thus, the Bank of Korea’s policy governance structure, with the Monetary Policy Committee at its apex, was completed, and the principles of "financial democratization" and "political neutrality of finance" permeating the Monetary Policy Committee were established as the two legislative spirits of the Bank of Korea Act.

Let us revisit the proposed amendments to the Bank of Korea Act and the Electronic Financial Transactions Act. From the moment politically sensitive employment stability is imposed as a goal, the Bank of Korea will be repeatedly placed on the political chopping block. Moreover, this goal will constantly conflict with the current objectives of price stability and financial stability, since there is little the Bank can do for employment stability other than pumping money into the economy. Ultimately, the employment stability goal will lead to the collapse of the Bank of Korea’s policy governance structure. On the other hand, if the parliamentary confirmation hearing procedure is added to the current nomination system for Monetary Policy Committee members, which is far from the fundamental standards of expertise and integrity, the politicization of the Monetary Policy Committee will only deepen. Finally, the central bank’s role as overseer of the payment and settlement system ultimately stems from its unlimited issuance power. If the Financial Services Commission suddenly intervenes as a supervisor in part of the consistent flow from payment to settlement (clearing), cracks will form in the Bank of Korea’s independent status and role, likely degrading both the efficiency and stability of the entire payment and settlement system.

In summary, the policy independence and governance structure of the Bank of Korea (Monetary Policy Committee), realized through the Bank of Korea Act enacted by the Bloomfield Mission, remain an invaluable fundamental principle today. It is urgently necessary to have the insight to discover in yesterday’s enacted Bank of Korea Act the "deep roots" and "deep springs" once sung in the Yongbieocheonga.

[Kim Hongbeom, Professor of Economics, Gyeongsang National University]

This content was produced with the assistance of AI translation services.