The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it.
Fiat, however, is inconvertible and cannot be redeemed simply because there is no underlying commodity backing it.
Because fiat money is not linked to physical reserves, such as a national stockpile of gold or silver, it risks losing value due to inflation or even becoming worthless in the event of hyperinflation.
Furthermore, if people lose faith in a nation's currency, the money will no longer hold value.
The U.S. dollar is considered to be both fiat money and legal tender, accepted for private and public debts. Legal tender is basically any currency that a government declares to be legal. Many governments issue a fiat currency, then make it legal tender by setting it as the standard for debt repayment.
Since fiat money is not a scarce or fixed resource like gold, central banks have much greater control over its supply, which gives them the power to manage economic variables such as credit supply, liquidity, interest rates, and money velocity.
Fiat money serves as a good currency if it can handle the roles that a nation's economy requires of its monetary unit: Storing value, providing a numerical account, and facilitating exchange. It also has excellent seigniorage, meaning it is more cost-efficient to produce than a currency that is directly tied to a commodity.
The mortgage crisis of 2007 and subsequent financial meltdown tempered the belief that central banks could necessarily prevent depressions or serious recessions by regulating the money supply.
A currency tied to gold, for example, is generally more stable than fiat money because of the limited supply of gold.
There also are more opportunities for the creation of bubbles with fiat money due to its unlimited supply.
Prior to the 20th century, most countries utilized some sort of gold standard or backing by a commodity. As international trade and finance grew in scale and scope; however, the limited amount of gold coming out of mines and in central bank vaults could not keep up with the new value that was being created, causing serious disruptions to global markets and commerce.
Fiat money gives governments greater flexibility to manage their own currency, set monetary policy, and stabilize global markets. It also allows for fractional reserve banking, which lets commercial banks multiply the amount of money on hand to meet demand from borrowers.
There is always the possibility of hyperinflation when a country prints its own currency. However, most developed countries have experienced only moderate bouts of inflation. In fact, having some consistent, low level of inflation is seen as a positive driver of economic growth and investment, as it encourages people to put their money to work rather than have it sit idle and lose purchasing power over time.
Having a relatively strong and stable currency is not only a mandate of most modern central banks, but a rapidly devalued currency is harmful to trade and obtaining financing.
Moreover, it is unclear whether or not hyperinflation is caused by "runaway printing" of money. In fact, hyperinflation has occurred throughout history, even when money was based on precious metals; and all contemporary hyperinflation has begun with a fundamental breakdown in the real production economy and/or political instability in the country.
