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The system folder refers to the folder in pre-OS X versions of the Macintosh® operating system (OS) that contains the files required for the OS to work. It is the folder that the computer looks for when booting up, and cannot start without it. The folder is usually stored in the root drive and is marked with a specific icon to identify it.
In older versions of the Mac OS, the system folder contained such things as fonts, control panels, preferences and system extensions. When the system would start, this is the folder it would look for first, as it had everything needed there to start the OS. If the folder was missing, the system could not start and would flash an icon in the shape of a disk with a question mark in it.
Normally, you would find the system folder in the root drive, the lowest level drive, but it is not necessary for it to be there; the system will look everywhere until it finds it when booting. In English versions of pre-OS X systems, the folder is named System Folder, but has different names in other languages. To avoid confusion then, the folder is identified by the OS by an identification number rather than by name.
One advantage of the system folder is that it can be moved dynamically. Even if the OS is running, the folder can be moved anywhere in the folder hierarchy, and it will not cause an issue. This information will be retained even upon restarting. This is referred to as a “blessed” folder, which simply means it is valid, works properly and will allow the system to start.
Being able to move the system folder is helpful in several ways. The main advantage is that versions of the folder that are moved or copied are also blessed. The Mac OS allows for multiple installations on one volume, so not only can you have multiple systems available to choose from when starting, you can also create backups for redundancy. Simply move a copy of the system folder to another drive, and you can boot from that drive.
The newer Mac operating systems do not have as much flexibility, but they are more secure with regard to the system folder. In older versions, the folder was relatively easier to edit and view, which could cause issues if a malicious or inexperienced user changed or removed the system files. This is not as issue in the newer versions, as the system files are spread out and not easy to edit.