Grades vs. Understanding

With standardized testing controlling our education system, standards based grading has become the trend in many school districts. My tendency towards maintaining tradition over fad may make me a biased judge, but I'd like to honestly evaluate the letter grade system and the standards based system. After reading "WASL Can Breed Student Frustration" in the Seattle Times, I couldn't stop wondering about that student has never received below a 'B', but hasn't passed the WASL.
Let us assume two things. One is that the statement is true; and two, that a cautionary percentage of students experience something similar.
Gradeinflation.com provides some statistics on the rise in Grade Point Average, and Harvey Mansfield wrote about a little experiment back in 2001. Could our trending to higher G.P.A's be contributing to the failure of students on state exams?
The letter grade system, A-B-C-D-F, is the most recognized and used system in the country. However, theorists like Ken O'Connor believe that the letter grade system is too subjective and that grading to a list of standards will solve those instances where students grade don't reflect student learning.
My belief is that both systems are inherently flawed because they both rely on subjective teachers to judge the quality of work. In a letter grade system, the teacher should explain to students what each letter grade would represent. In a standards based system, the teacher should explain what exactly the standard looks or sounds like. Both are subjective.
What concerns me, though, is not which system we choose to use. I am most worried about our trending towards not holding students fully accountable for their work. It begins early with social promotion. It begins early with teachers who hand out high scores for mediocre work. Not every student is exceptional in every subject. We need to stop treating our students as if they are.
The article reminded me of the many times I've marked a student's essay with an average score. The essays are typically distinguished by poor sentence structure or undeveloped thoughts. The student will whine that they've always received A's. Sorry. Welcome to the real world.