Money has four important characteristics that a person should understand. A better understanding of money will allow a person to know exactly what he is getting for his products and labor. So let's start with the first characteristic.
1. Unit of Account - Money serves as a unit of account in which all other values such as goods and services are expressed. Money eliminates the near impossible task of evaluating goods and services directly to each other. With money, a dairy farmer does not have to value his milk against a car dealer's car. Such as, how many gallons of milk will equal the value of one car? If all goods were expressed in the form of money their price becomes much easier to determine.
2. Medium of Exchange - This is probably the most common understanding of money. Money serves as a medium of exchange allowing easier transactions among people. Without a medium of exchange people had to trade or barter with goods or services they could provide. However, this became a problem because people may not have the right goods or services to use as a medium of exchange.
For example, the diary farmer may want a car but only has his milk to trade but the car dealer doesn't need any milk, so how was the dairy farmer going to trade for a car if all he had was milk? Well he had to trade his milk for item(s) that the car dealer is willing to trade. Of course, you can only imagine just how much of a hassle this would of been for the diary farmer.
But with money as a medium of exchange, everyone is willing to accept money for all trade or purchases. A dairy farmer could sell his milk for money and use the money to purchase a car from the car dealer.
3. Store of Value - Store of value is probably something that most people over look. Money has to have a store of value so that it will encourage people to save their money for later use. I have said it before in a previous post that savings is a key factor for economic growth.
An economy without savings cannot grow to produce capital investments that would be used to create future economic growth. To clarify, if an economy consumed everything it produces there would be nothing left to save and use for future production and growth.
4. Unit of Deferred Payment - The fourth and last characteristic is deferred payment. A deferred payment means to allow someone to borrow money from another person who may not currently need it. Deferred payments are normally charged with interest and the interest is set on how well money stores its value. If money is losing value through inflation then interest rate are set relatively high to compensate for the lost value, however, if the value of money is stable then interest rates are set relatively low.
Throughout human history money was used in many different forms starting from, cattle, salt, seashells, copper, silver, and gold. So what is money? Well money could be anything if it meet the four characteristics of money. If one of the four characteristics is missing in the application of money, the item that is being used for money will ultimately fail, and if the money collapse, all economic activity will also collapse. Thus, sound money is important for economic progress and prosperity.