One of the problems with finding a suitable medium for money is that we expect it serve a number of functions. A medium of exchange, a store of value, a unit of account. Gold is useful for those most worried about money as a store of value, for its ability to hedge against inflation. But if you tie your currency to gold, your domestic economy is held hostage to the whims of international gold flows. And you might be compelled to tighten credit at the worst possible time, when the national economy is already contracting.
I don't know a lot about free banking, so I can't comment, but I will read up on it.