To understand why credit is a form of fiat money, one must first understand what money is. At its most basic level, money functions as a common medium of exchange, facilitating the trading of goods between individuals, companies and governments. Before money, people bartered for goods and services, trading what they had in their possession for another person's goods or services. Bartering evolved into the use of the more standardized money.

Money once had value according to the value of the underlying commodity from which it was made, such as gold. Most modern money, though, is not intrinsically of any value. Its use is based on both parties' common agreement to use the money, shared acceptance of the value assigned and shared agreement to accept it as currency.

Instead of commodity-based money, economies now are based on fiat money. Fiat money, Latin for "it shall be," has value because a government decrees that it does. The government gives it value as currency and people have faith in that value, based largely on the perception of a government's stability and economy's ability to produce. Fiat money is not backed by any commodity of value.

Credit is essentially money exchanged between the present and the future. Instead of simultaneously trading money for goods or services received, credit allows a delayed exchange, with goods or services received today in exchange for a promise to pay tomorrow. Since it is a future monetary claim, credit is still money. As such, credit is a form of fiat money.

  1. Is all paper money fiat money?

    Learn how the United States has converted from a gold-backed money system to a fiat one. Learn what is considered fiat money ... Read Answer >>
  2. Is fiat money more prone to inflation than commodity money?

    Learn more about commodity and fiat money and some of the differences between them. Find out when the U.S. abolished the ... Read Answer >>
  3. What is the difference between fiat money and legal tender?

    Learn more about fiat currency and legal tender. Find out how these terms are used by economists to describe different types ... Read Answer >>
  4. What impact does inflation have on the time value of money?

    Understand the impact that inflation has on the time value of money. Learn what you can do to mitigate the effects of inflation ... Read Answer >>
  5. What are some examples of barter transactions?

    Learn how bartering involves the provision of goods or services in exchange for other goods or services, and review different ... Read Answer >>
  6. What is the difference between barter and currency systems?

    Learn the difference between barter and currency systems in the trade of goods and services, and why currency is preferred ... Read Answer >>
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