The accompanying figure illustrates the problem schematically. As the figure suggests, over the past century we have tried all of the possibilities. To get a sense of why the dilemmas refuse to go away, let's try choosing each of the vertices in turn and see why it requires abandoning one of the others. This means that it must either peg its exchange rate, or at least manage it strongly. So a choice must be made.
History offers clear examples of both choices.
As Barry Eichengreen points out in his Globalizing Capital , the interwar experience was interpreted by the founders of Bretton Woods as compelling evidence that speculation was indeed destabilizing, and hence that confidence was necessary. Again, history offers clear examples of both moves. For emerging markets, however, this option is far less plausible. But the majority opinion right now seems to be that the burden of foreign currency debt and the risk of inflation from massive currency overshooting makes the flexible-rate side of the triangle unacceptable to many smaller economies. But they need to persuade the voters - and persuade the markets that they have persuaded the voters.