In The Death of Money, James Rickards contends that the “international monetary system has collapsed three times in the past hundred years, in 1914, 1939 and 1971.” He's right about 1914 and 1939, but wrong about 1971. In 1971, there was change, but not a collapse. Collapses cause world wars, and except for Viet Nam and the Arab-Israeli conflict, the 1970's was a relatively peaceful decade.

A few weeks after the D-Day invasion in 1944, when it became apparent who was going to write the new rules of money, it was decided at the Bretton Woods Conference in New Hampshire that the U.S. dollar would replace the pound sterling as the world's “reserve currency.” Since then, America has supplied almost every nation on earth with the money it uses in international trade.

That era is over. So naturally, many in the global financial community are wondering what will replace the U.S. dollar as the world's reserve currency. There's been a lot of talk lately about the petrodollar. The term “petrodollar” was coined by Egyptian economist Ibrahim Oweiss as a way to describe how oil producing and exporting countries were accounting for oil units outside of the regular money supply.

In 2008, during the height of the financial crisis, the World Economic Forum ranked Canada's banking system as the most stable in the world, while America was 40^th.. One of the reasons is Canada's economy, which is basically oil. “Canada has a petro currency,” says John Hardy of Saxo Capital Markets. In 2011, the Bank of Canada issued $5 and $10 polymer bank notes, but like all fiat currencies, they melted (literally). Canada has a petro currency, but not a petrodollar.

The problem with the petrodollar is that we don't have it yet. Nobody does. It doesn't exist. Canada is the world's sixth largest oil producer, but the Canadian dollar is not a petrodollar. Just because a dollar is the medium of exchange in a nation that produces 3 million barrels of oil per day does not make it a petrodollar. Iraq, Kuwait and Libya are big oil producers, but are on the dinar, not petrodollar.

Be it oil, silver or gold, a “commodity” currency would allow full convertibility. By that definition, the petrodollar will not come about until it is fully convertible into a fixed amount of oil. The fact that OPEC uses dollars does not make them petrodollars. OPEC is not a bank, and the dollars it uses are not convertible into oil that depositors can take possession of.

The United States used to have a commodity-backed currency. There was a time in America when you could walk into a bank branch, fill out a withdrawal-slip for $100, and walk out with two twenties, two-tens, a five and a gold coin. It rarely happened, but you could if you wanted to. The bills were de-facto gold certificates.

If a petrodollar comes to America, you won't see people walking into banks and carting out barrels of oil. Those dollars will be redeemable for oil stored somewhere, but not taken in physical possession. The U.S. strategic petroleum reserve has around 695 million barrels, stored at various facilities in Texas and Louisiana.

Would there be a “run on oil?” Probably not. North Dakota has an estimated 7.4 billion barrels of undiscovered, technically recoverable oil according to the U.S. Geological Survey, and shale formations in Pennsylvania, Ohio and California look very promising.

With NYMEX futures moving between $90 and $100, the Fed could easily fix one barrel of oil to one-hundred dollars and be done with it. The downside, of course, would be a tight trading range on crude oil. This wouldn't go over well with the New York Mercantile Exchange or speculators on the NYMEX. Fixing oil to the dollar would effectively do away with futures on West Texas Intermediate, the “light, sweet crude” that is delivered at the hub in Cushing Oklahoma.

Other than that, a petrodollar is a good idea. In the first quarter of this year, the United States surpassed Saudi Arabia as the world's number one producer of oil, at over 7 million barrels per day. Article 1 Section 8 of the Constitution gives Congress the power to “to coin money,” and “regulate the value thereof.”        

We have the oil. Some call it “black gold.”

At $1,280 an ounce, a return to a gold dollar seems highly unlikely. At $100 a barrel, would Congress go for a petrodollar?