Since the U.S. left the gold standard, inflation has been a near-constant problem and several official attempts have been made to mask its effect.  Today the gold standard is a foot-note of history and fiat currencies rule the market - or do they?

The obvious problem with the gold standard is scarcity.  At current market prices, there simply isn't enough gold to match the world's currency volume.  Any attempt to peg national currencies to this precious metal would lead to a massive run on its price - potentially making billionaires out of any bulls with a significant stockpile.  There are plenty of reasons why a gold standard won't work, but arguing for or against it is almost besides the point.

The bigger issue is that fiat currencies don't work either.  The basic purpose of a currency is to mark a standard unit of exchange.  It leads to pricing expectations.  We come to expect that a gallon of gas is x dollars or that a dozen eggs is y dollars.  The other purpose of a currency is to cure an inefficiency of barter:  finding someone with a product you want who also wants your product (or service).  And again, fiat currency fails the test.  Every day on international webmaster forums I see people who no longer want to take payment in dollars, or who are selling their dollars as soon as they receive them.  

For now, many of the small-time investors and business people are just moving into other fiat currencies with "stronger fundamentals" but even that presents a problem.  While the European Central Bank (ECB) might hold interest rates steady and show appreciation against the weakened dollar,  they're still watching their purchasing power decline relative to the tangible goods that truly measure wealth.

And this is where we come back full circle to the concept of asset-backed currencies.  While the Euro, yen, yuan, and even peso are holding strong against the dollar, they are not even close to the best performing paper "currency."

In fact, the best paper money on the market today is an oil futures contract.  Gold makes sense as a vehicle for investment, but economies won't grind to a halt because they've run out of shiny stuff.  This is where the "oil standard" currency comes in, because it is a true, natural limiter of a nation's wealth.  For all the academic debate about fiat currencies and their supposed flexibility and functionality, they're all being killed by the paper backed with oil.  

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Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved.