After American occupation, the scarcity of consumer goods and an excess of newly printed money causes runaway inflation. The Bank of Korea is established in 1951 as the national bank, responsible for producing and issuing all currency and overseeing private banks. Five commercial banks are privately owned.
Foreign aid comprises almost half the national budget. In 1954 the Bank of Korea begins to regulate the country's commercial banks. Inflation is high as a result of shortages from the war and the costs of supporting a large standing army, but prices stabilize by 1958. The inefficiencies of the Rhee administration, among them unfair taxation, have led the country to the brink of bankruptcy.
Domestic savings hovers around 2 percent of the GNP. Park nationalizes commercial banks; the government takes control of credit allocation to businesses. A high-interest "curb market" emerges, providing fast cash for smaller companies unable to obtain financing otherwise. The won is devalued to help drive business growth. Savings rises to 10 percent, boosted by interest rates of 20 percent.
The growth rate begins to decline, and a burgeoning money supply causes double-digit inflation. Consumer prices rise as much as 30 percent. The cost of living rises 26.3 percent, yet the average income rises just 12 percent. A stabilization plan does just the opposite, and the recession it causes results in widespread bankruptcies and unemployment. The savings rate rises to 28 percent.
Reducing the growth of the money supply and liberalizing import and foreign investment policies controls rampant inflation. The government relinquishes control of the commercial banks and encourages the establishment of more commercial banks. The Korean Stock Exchange flourishes. Thanks to a consistent rise in income, savings in 1987 reaches 36.3 percent of the GNP, up from 20.8 percent in 1980.
A national pension system covering age pensions, disability, and survivors' pensions is introduced, as is unemployment insurance. Luxury spending increases as consumers enjoy growing personal savings and annual double-digit wage increases since 1987. The country's economic growth slows, but it still maintains a respectable rate of 6.5 percent. Inflation increases along with wages.
The Bank of Korea reduces the money supply to hold down inflation. Chaebol take on staggering internal debt, upward of US$350 billion. When the 1997 financial crisis wracks the region, South Korea suffers. Record numbers of small companies go bankrupt, as do several chaebol. The value of the Korean won falls more than 50 percent against the U.S. dollar, and the stock market falls to a 10-year low.
In an effort to help bolster the economy, private citizens collect gold to increase foreign exchange reserves, amassing 227 tons worth roughly US$2.2 billion. Income tax cuts of as much as 30 percent relieve the burden on low- and middle-income families; further policies are implemented to enable and encourage savings among this group. The won strengthens in 2002 amid overall economic recovery.
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