A:

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.

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