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Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution. For example, since one ounce of gold is equivalent to any other ounce of gold, gold is fungible. Other fungible commodities include sweet crude oil, company shares, bonds, precious metals, and currencies. Fungibility refers only to the equivalence of each unit of a commodity with other units of the same commodity. Fungibility does not relate to the exchange of one commodity for another different commodity.
The word comes from Latin fungibilis from fungi, meaning "to perform", related to "function" and "defunct".
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Fungibility versus liquidity
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Fungibility is different from liquidity. A good is liquid if it can be easily exchanged for money or another different good. A good is fungible if one unit of the good is substantially equivalent to another unit of the same good of the same quality at the same time and place.
- Cash is fungible: one US$10 bank note is interchangeable with another. It is also interchangeable with two $5s, ten $1s, and other combinations.
- Different issues of a government bond (maybe issued at different times) are fungible with one another if they carry precisely the same rights and any of them is equally acceptable in settlement of a trade.
- Diamonds are not perfectly fungible because diamonds' varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size.
- Packaged products on a retail shelf are fungible if they are of the same type. Customers and clerks can interchange packages freely until purchase, and sometimes afterward. When the customer opens the package and uses the product, however, it is usually considered unique and no longer interchangeable with unopened packages unless there is some customer service issue, such as a return or exchange. Even then, the customer might consider a swap with a trusted friend who also buys the same product.
Fungibility does not imply liquidity, and vice versa. Diamonds can be readily bought and sold (the trade is liquid) but individual diamonds, being unique, are not interchangeable (diamonds are not fungible). Indian rupee bank notes are mutually interchangeable in London (they are fungible there) but they are not easily traded there (they cannot be spent in London). In contrast to diamonds, gold coins of the same grade and weight are fungible, as well as liquid.
Fungibility in US law
In legal disputes, when one party is compelled to remedy another party as the result of a ruling or adjudication, the appropriate legal remedy may depend on the fungibility of the underlying right, obligation or property interest that is intended to be restored. Depending on whether the interests of the aggrieved party are fungible (a determination made by the trier of fact) the appropriate remedy may change. For example, a court may require specific performance (an equitable remedy) as a remedy for breach of contract, instead of the more favored remedy of monetary damages.
Fungibility is also important in the context of product liability. If a plaintiff is injured by a fungible product but is unable through no fault of her own to identify the manufacturer of the product that actually injured her, jurisdictions that follow the doctrine of market share liability can shift the burden of disproving liability to all manufacturers of that product. If the defendants fail to rebut the presumption of liability, they will be liable pro rata based on their market share during the relevant period.
If Alice lends Bob a $10 bill, she does not care if she is repaid with the same $10 bill, two $5 bills, a $5 bill and five $1 bills or a bunch of coins that total $10 because currency is fungible (noting that, in practice, some denominations might incur additional operational or processing costs). However, if Bob borrows Alice's car she will most likely be upset if Bob returns a different vehicle—even a vehicle that is the same make and model—as automobiles are not fungible with respect to ownership. However, gasoline is fungible and though Alice may have a preference for a particular brand and grade of gasoline, her primary concern may be that the level of fuel be the same (or more) as it was when she lent the vehicle to Bob.
Fungibility has been used to describe certain types of tasks that can be broken down into interchangeable pieces that are easily parallelized and are not interdependent on the other pieces. As an example: If a worker can hand dig 10' of ditch in a day, and a 100' ditch needs to be dug, either that worker can be given 10 days to complete the entire project, or 9 additional workers can be hired and the project can be completed in a single day. Each worker can complete his piece of the project without interfering with the other workers, and more importantly, each worker is not dependent on the results of any of the other workers to complete his piece of the total project. On the other hand, non-fungible tasks tend to be highly serial in nature and require the completion of earlier steps before later steps can even be started. As an example of a serial task that is not fungible: Suppose there was a group of 9 newly pregnant women. After 1 month, these women would have experienced a total of 9 months of pregnancy, but a complete baby would not have been formed.
Oxford theoretical physicist David Deutsch has adopted the economic term fungible to describe the physical nature of quantum particles and universes within the quantum multiverse, where, by virtue of being identical in all respects, different particles chaotically divide or combine as a result of physical interactions from a common fungible fund in superposition.
In some software engineering circles, fungibility is used to refer to the ability of an engineer to apply their skills to different problem sets. It is used as an antonym to specialization.
- S. Williston, The Law of Contracts § 1338 (1920); Farnsworth, E. Allan (1970). "Legal Remedies for Breach of Contract". Columbia Law Review 70 (7): 1145–1216. JSTOR 1121184.
- Bunge Corp. v. Recker, U.S. Ct. of App., 8th Cir., 1975; Restatement (Second) of Contracts Ch 16. introductory note (1981)
- Deutsch, David (2011). The Beginning of Infinity. London: Allen Lane. ISBN 978-0-7139-9274-8.
- Bartram, Söhnke M.; Fehle, Frank R. (March 2007). "Competition without Fungibility: Evidence from Alternative Market Structures for Derivatives". Journal of Banking and Finance 31 (3): 659–677. doi:10.1016/j.jbankfin.2006.02.004.