Question

how was the bretton woods system deflationary

Answer 1

//There was a lot to write but I make it precise for the better understanding//

In the Bretton Woods system 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, Bretton Woods system described 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. 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.

Even though few currencies were convertible into gold, policy makers thought that currencies should be backed by gold and willingly adopted deflationary policy

Deflationary policy is not the only option when faced with BP(balance of payment ) deficits

Changing the value of dollar in terms of gold has no real effect, because the values of other currencies were pegged to the dollar. This is the n-th currency problem.This problem would not have existed if most of other currencies were pegged to gold. However, none of these currencies were pegged to gold because they were not convertible into gold. (limited supply of gold)

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

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