Money is an artifact accepted by general agreement as a vehicle for economic exchange. It is the usual thing in which prices and values are conveyed. It circulates between people and between countries, hence facilitating trade. Moreover, it is the principal way in which wealth is measured.
The subject of money has intrigued men of wisdom from the epoch of Aristotle to the current time because it has so many secrets and so much ambiguity. The piece of paper labelled fifty pounds, one hundred euros or five hundred dollars is, as paper, hardly different from any piece of the same size cut from a magazine. Yet it can enable its presenter to exchange it for food, drink, clothing, etc, while the other is useful only to light a fire.
People accept money as money because they are confident that others will do so. The pieces of paper have value because everyone thinks they do, and people think they do because in their experience they always have done. At base, money is a social convention and a convention of singular strength that people will keep to, even under extreme conditions. The power of this convention is, of course, what helps governments to profit by inflating currencies. But it is not indestructible. When big variations happen in the quantity of these pieces of paper, as they have done during and after wars, they can be seen to be, after all, little more than pieces of paper. People will then seek an alternative currency for a while, like the cigarettes and cognac that for a time became the medium of exchange in Germany after the 2nd World War.
The primary function of money is to facilitate the separation of buying from selling, therefore allowing trade to occur without the use of barter. If someone has something to sell and wants something different in return, with money it is unnecessary to search for someone able and willing to make an exchange of goods. The person can then sell the surplus goods to create general purchasing power, in the form of money, to anyone who wants to purchase. They then use the proceeds to buy the item they desire from someone willing to sell it.
The importance of this use of money is poignantly illustrated by the experience of the Germans following the 2nd World War, when paper money became almost useless because, despite inflationary conditions, price controls were effectively enforced by the armies of occupation. Residents needed to resort to barter or to less efficient alternatives to money . The result was to half the total output of the economy. The “economic miracle” in Germany just after 1948 partly reflected a currency reform by the authorities of occupation, but some economists regard that it initiated primarily from the German government's price control elimination, thereby allowing a barter economy to be replaced by a money economy.
Separating out the act of purchase from the act of sale necessitates the existence of something that will be generally acceptable as payment. This is the “medium of exchange” function of money. But there must in addition be something that can serve as a temporary means of purchasing power, in which the seller retains the proceeds in the gap between the initial sale and a following purchase, or from which the buyer can extract the general power of purchase, with which to pay for the things which are bought. This is the “asset” function of money.