Breton Woods system provided a compromise between fixed and floating exchange rate systems

The new international monetary arrangement agreed in the Breton Woods conference is often called Breton Woods system. The Breton Woods system provided a compromise between fixed and floating exchange rate systems.

It was a modified gold exchange standard in which the member countries maintained adjustable pegs relative to U.S. dollar. The U.S. undertook to exchange gold for dollars with foreign central banks at a fixed rate.

The new system aimed at (a) establishing international harmony and exchange rate stability associated with the gold standard; and (b) allowing individual countries the freedom to pursue their own macroeconomic policy.

The Breton Woods system of adjustable pegging faced recurrent crises and finally collapsed in 1973. The fundamental defect of the system was its own contradictory framework.

The three basic features of the system, i.e., constant exchange rates, autonomous national macroeconomic policies, and international capital mobility, could not continue together for a long time.

Despite the collapse of the Breton Woods System, the IMF, which was founded as part of this system, still plays an important role as an international financial institution.