In a fixed exchange rate system, the domestic monetary policy is primarily used to maintain the exchange rate's stability. Any independent use of monetary policy to target domestic economic conditions could lead to conflicts with the exchange rate target. For instance, a monetary expansion could depreciate the currency, forcing the central bank to intervene in the foreign exchange market to maintain the fixed rate, thus neutralizing the original monetary stimulus .

Fiscal policy mainly influences domestic economic conditions, such as aggregate demand, and doesn't directly affect fixed exchange rates. Under fixed exchange systems, policies addressing external imbalances (like trade deficits) usually involve exchange rate adjustments or other external interventions. Thus, fiscal policy changes aimed at addressing internal issues like unemployment could worsen external imbalances (e.g., an expansionary fiscal policy could worsen a trade deficit), making it difficult to achieve both balances simultaneously .

The policy tools of the Bretton-Woods system, including exchange rate adjustments, IMF interventions, and international reserves, aimed to provide stability and predictability in international trade and finance. They allowed countries to manage their currency's value within pre-set limits and access temporary financial resources to balance payments. These tools helped reduce the frequency and severity of currency crises and supported steady economic growth by preventing extreme fluctuations in exchange rates .

Excessive current account surpluses can indicate an over-reliance on exports and under-consumption domestically, potentially leading to economic imbalances. These surpluses mean that a country accumulates large claims on foreign wealth, which could become problematic if exchange rates fluctuate or if there are political risks in countries where the wealth is held. In addition, large surpluses can evoke retaliatory trade policies from deficit partners, straining international relations .

The Bretton-Woods system utilized tools such as exchange rate adjustments within agreed-upon bands, international reserves for temporary liquidity support, and, critically, the International Monetary Fund (IMF) which provided member countries with temporary financial assistance to help stabilize their economies and manage balance of payments deficits .

Under the gold standard, international trade imbalances were automatically corrected due to the flow of gold between countries. When a country had a trade surplus, it received gold inflows, increasing its money supply and leading to price level increases. Conversely, a trade deficit caused gold outflows, decreasing the money supply and reducing domestic prices. These automatic adjustments in price levels would eventually equalize trade balances, preventing perpetual surpluses or deficits .

Governments tend to avoid large current account deficits because they can lead to unsustainable borrowing from foreign countries, potentially resulting in a debt crisis. A deficit implies that a country is spending more on foreign trade than it is earning, which may necessitate borrowing from foreign creditors to cover the shortfall. Over time, this can increase a country's vulnerability to economic downturns or sudden shifts in investor confidence, affecting exchange rates and leading to more severe economic challenges .