Currencies and the attention standard

Prior to 1931, most of the world’s currencies were on a gold standard. This meant that any citizen could walk into a bank and exchange their cash for a certain amount of gold. In 1931, Britain became the first country to suspend its citizens’ right to exchange British Pounds for gold. This move was copied by every major country over the following decade including the US in 1933.

Although the citizens of many countries lost the ability to convert their national currencies into gold throughout the 30s, those currencies were still officially backed by gold in some sense because the governments of different countries could still redeem each other’s currencies. The next significant shift in monetary policy came in 1944 with the introduction of the Bretton Woods system. Under this system, all major currencies became pegged to the US dollar. At this point, the US dollar was still theoretically backed by gold since all governments could redeem their holdings of US dollars for gold.

In 1971, Charles De Gaulle, the president of France became concerned that the US may have printed and distributed more dollars than it had in gold reserves, as as result, France began to redeem gold in exchange for its US dollars. Other countries took note and began to follow suit; the ensuing international panic created a global run on US gold reserves. That same year, likely upon realizing that the US would not be able to continue to honor all outstanding claims for gold, president Richard Nixon announced that the US would abandon the gold standard completely.

As a direct result of this policy, all of the world’s currencies became free-floating. Due to the legacy of the Bretton Woods agreement, all other national currencies were still backed by the US dollar which was itself no longer backed by gold.

As a result of this, many people today make the argument that fiat currencies are not backed by anything. Others make the case that modern currencies are backed by intangible forces such as ‘government coercion’ which is enacted through taxation (I.e. by demanding that citizens pay taxes using the national currency). But as Bitcoin and other cryptocurrencies have demonstrated, coercion alone cannot fully justify why a currency has value since people are not forced to buy Bitcoin — In fact, governments generally try to dissuade citizens away from cryptocurrencies rather than towards them.

The value of a currency appears to be determined in a large part (though not entirely) by its ability to capture a share of people’s collective attention. Media companies have already figured out a long time ago that they could generate demand for specific products and services by capturing people’s attention and then directing it towards those products and services.

It seems plausible that this philosophy can also be applied to currencies and cryptocurrencies as well as tangible forms of money such as gold. Why is gold valuable? Aside from scarcity, people will point out psychological factors— Others will point to its commercial applications. All things considered, the price of gold is ultimately a function of its supply relative to demand. If we were to analyze the demand for gold, we would find that it is mostly based on psychological factors; the biggest buyers of gold want it simply because they know that other people also want it. They know that gold occupies space in the collective mind, especially during times of uncertainty. We could remove all commercial use cases and the price of gold would probably not be affected significantly. Like any other currency, most of the value of gold is in its brand and not in its substance.

An attention standard for currencies should be thought of as ‘brain real estate’; it’s not only about the total number of people who know about a currency (awareness) but it’s also the average amount of time that each of those people spends thinking about that currency (attention). Also, it’s important to note that not everyone’s attention is worth the same economically. The attention of an individual who controls a significant share of the means of production is worth more than that of an average person who controls only the output of their own labor.

When we start to think of currencies as brands which hold a share of the world’s collective financial attention, we can start to see some of the shortcomings of our current global fiat monetary system:

• The mindshare of each brand of fiat currency is already massive and probably nearing its maximum ‘peak attention’. Their affiliations with specific nation states limit further growth.
• Fiat currencies are inflationary; as more units are created/printed over time, each unit of currency represents a decreasing portion of the total supply.

When we consider alternative currencies like Bitcoin (and certain other cryptocurrencies), we get a very different picture:

• The current mindshare of the Bitcoin brand is tiny compared to that of national fiat currencies so there is significant room for growth. Bitcoin has already demonstrated significant, sustained traction and is not affiliated with any specific state and so it is not limited in the same way as national fiat currencies are.
• Bitcoin is deflationary since there is a hard upper bound on its quantity; this means that, over time, each unit of Bitcoin represents an increasing portion of the total circulating supply.

Gold is similar to Bitcoin but slightly more inflationary since more people will start mining it as its price increases and thus the total supply can increase slowly over time. Gold also occupies a much larger mindshare than Bitcoin so it has less room for growth.

Thinking about all forms of money in terms of a global attention standard, it should be clear that Bitcoin has the potential to become much more valuable than gold. That said, Bitcoin has a very different risk profile than gold since it has additional dependencies which are necessary to maintain its integrity; for example, it relies on a relatively stable network infrastructure and mining hardware.

Another important aspect of Bitcoin and cryptocurrencies which is going to be increasingly relevant in the future is the opportunity that they provide for third-party software integrations. As our economy becomes increasingly automated and digitized, currencies are competing with each other to be integrated into as many software systems as possible. As these systems and algorithms become the backbone of the economy, they create continuous demand for all the currencies that they integrate with. Unlike fiat currencies, cryptocurrencies are trustless, decentralized and immutable — Critically, many of them are also transparent since their ledger of accounts are entirely public. The transparency aspect of cryptocurrencies is important since it facilitates maximum adoption and opens up integration opportunities between different systems which don’t necessarily trust each other.

The decentralized aspect of cryptocurrencies is also going to become particularly important as we collectively begin to realize that the centralized systems which are supposed to control and protect the things that we care about are becoming increasingly unreliable or corrupted.