The function of money as a means of payment reflects the peculiarities of the credit economy, i.e. realities of buying and selling goods on credit with a deferred payment (deferred payment). Buyers pay for goods only when the due date is due.
Instrument of payment – This is a function in which money serves the repayment of various debt obligations between the subjects of economic relations arising in the process of expanded reproduction.
Historically, this function comes from turnover. Its appearance was due to the sale of goods on credit, since this arose a debt, the repayment of which was carried out in money. This was already fundamentally different money, different from the medium of circulation. This difference is explained by the time factor that separates the sale of goods (in debt) from payment to pay off the debt. During this time, the value and form of money, the debtor himself and the creditor, and the like can change. Therefore, the cost of payment is not always equivalent to the value of the goods sold on debt, or the value of money that has been lent. The economic relations arising from the repayment of debts, especially long-term ones, not only contain their fundamental principle – the purchase and sale of goods, but also reflect many other phenomena that have occurred in the economy during the use of a loan: a change in the value of a monetary unit, price fluctuations, government intervention in monetary sphere, change in interest rates and the like.
With the deepening of economic relations (turning them into purely monetary ones) and the widespread development of credit and financial ties, money as a means of payment gradually went beyond commodity circulation and began to serve the repayment of various obligations in society, if they are expressed in monetary form. As a means of payment, money began to carry out independent movement without direct connection with the circulation of goods, to serve the one-way movement of value in the process of expanded reproduction, in particular when making payments to the state budget and other centralized targeted funds and financing the public needs of these funds, when issuing and repaying bank loans and the like.
Money as a means of payment, like a means of circulation, is transferred from one subject of relations to another, that is, they carry out circulation. Therefore, when it comes to monetary circulation, then most often we mean their functioning both as a means of circulation and as a means of payment. Accordingly, the total mass of money in circulation includes their quantity in both of these functions. The requirements of the law of monetary circulation apply to the total mass of money, that is, to both of their functions.
In a developed market economy, money as a means of payment serves most of the entire economic turnover. Therefore, the scope of their application is very wide and covers:
- payments between enterprises, economic organizations and institutions for mutual debt obligations;
- payments of enterprises, economic organizations and institutions to their employees related to wages;
- payments of legal entities and individuals to centralized financial funds, receipt of funds from these funds;
- deposits by legal entities and individuals of their money in banks, their receipt of cash loans from banks and repayment of them in due time;
- various payments related to property and liability insurance of legal entities and individuals;
- other payments – administrative and judicial, payment of inheritance, donation, etc.
The expansion of the sphere of functioning of money as a means of payment occurs at the expense of the sphere of their function as a means of circulation. However, this process does not have any negative impact on the economy. On the contrary, the function of a means of payment provides broader opportunities for the enterprise than the function of a means of exchange, since it removes the restrictions that create a purely equivalent exchange in the case of immediate payment for goods (“Goods – Money”), expands the flexibility of funds, makes it possible to make payments through offsetting counter obligations, which helps to save money and accelerate capital turnover, and the like. At the same time, this function potentially contains the threat of non-payment, which, if implemented on a large scale, could lead to a monetary crisis.
The market puts forward the same requirements for money as a means of payment as for a medium of exchange, except in a different area. In particular, the need for the constancy of money in this function turns out to be even more acute, since here, as already indicated above, the time factor is at work. If during the period of using the loan the money is depreciated, then the lender will not return the value lent to him and incur losses, because he will not be able to buy the previous amount of goods for the returned amount of money due to their rise in price. The debtor, accordingly, will benefit in this case. To avoid this, it is necessary to adjust the interest rate in accordance with the depreciation of money, which negatively affects the state of credit relations in the economy. In addition, the rise in lending interest itself is an inflationary factor and leads to further depreciation of money.
These phenomena were fully manifested in the economies of the post-Soviet countries during the period of market transformation, when inflation became widespread. Within a short time, the level of interest on loans increased several times, which held back the development of credit relations and economic growth in general.