What is Money?

Money is primarily a medium of exchange or means of exchange. It is a way for a person to trade what he has for what he wants. Ideal money has three critical characteristics: it acts as a medium of exchange; it is an economic good; and it is a means of economic calculation.

Medium of Exchange

To properly understand money as a medium of exchange one must first go back to the first methods of trade. Before money was invented one would have to engage in direct barter. A farmer who produced grain – but wanted shoes for his family – would have to find someone who, a) had shoes and, b) wanted grain. You can imagine the difficulty involved in finding that perfect someone who had what the farmer wanted and wanted what the farmer had.

Out of necessity, this gave rise to indirect barter. Continuing with our example above, let’s assume that the farmer found a shoemaker but discovered that the shoemaker did not want grain – he wanted candlesticks. While having a drink at the local pub he overheard the gentleman next to him lamenting that he needed grain in exchange for his candlesticks. Naturally, the farmer traded his grain for the candlesticks and went back to the shoemaker and traded the candlesticks for shoes. In this example, the farmer performed indirect barter when he used the candlesticks as a medium of exchange.

Economic Good

Over time, different commodities served as medium of exchange but the problem of marketability and durability came into play. A necessary and highly exchangeable commodity was food. The problem is that it was perishable. One had to either use it or trade it before it went bad. Over time, the most marketable and durable commodities came to be used as medium of exchange – commodities such as gold and silver. Since gold and silver  did not rust nor rot they were ideal economic goods. Over time they became the preferred medium of exchange.

Economic Calculation

Money is an expression of exchange value (the exchange values placed on goods by traders in the marketplace). In our examples above, it was extremely inefficient to express the exchange value of goods in units of sacks of grain, shoes, or candlesticks. Out of necessity the market gravitated toward the use of the exchange value of fixed weights of gold and silver. As an example, the original U.S. Silver Dollar was modeled after the Spanish Dollar which had a specific weight of silver (371 4/16th grains of pure silver or 416 grains of standard silver). A simple method of economic calculation consisting of weights and measures greatly improves trade and fosters economic growth.

Source:  https://economicsandliberty.wordpress.com/what-is-money/