Recall that the representatives of the US and its Allies worked out three post-war arrangments:

Exchange rates were not permanently fixed, but occasional devaluations of individual currencies were allowed to correct fundamental disequilibria in the balance of payments (BP) . Ever-increasing attack on the dollar in the 1960s culminated in the collapse of the Bretton Woods system in 1971, and it was reluctantly replaced with a regime of floating exchange rates.

For 25 years after WWII, the international monetary system known as the Bretton Woods system, was based on stable and adjustable exchange rates.

Currencies were convertible into gold, but unlike the gold exchange standard, countries had the ability to change par values of their currencies . For this reason, Keynes described the Bretton Woods system as "the exact opposite of the gold standard." The world economy tripled in size during the two decades, but gold supply did not change much.

The adjustable peg was viewed as a vast improvement over the gold exchange standard with fixed parity .

Deflationary policy is not the only option when faced with BP deficits. Devaluation is accepted in Bretton Woods.

Before World War II, European nations often used this policy, in particular the Great Britain. Even though few currencies were convertible into gold, policy makers thought that currencies should be backed by gold and willingly adopted deflationary policies after WWI.

Deflationary policy : Under the gold exchange standard, a country has to resort to the classical medicine of deflating the domestic economy when faced with chronic BP deficits.

Unanticipated Problems