Finder would automatically bless the first folder it saw containing both "System" and "Finder" (configurable in the boot blocks), and unbless any folder that you removed either "System" or "Finder" from.
Nice explanation! To add to the memory trip, in the older days, if a folder was blessed, its icon in Finder had a special "system symbol". As you said, if you "unblessed" the folder by removing System or Finder, the folder icon would revert to the plain icon version.
