Fungibility

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies. For example, if someone lends another person a $10 bill, it does not matter if they are given back the same $10 bill or a different one, since currency is fungible; if someone lends another person their car, however, they would not expect to be given back a different car, even of the same make and model, as cars are not fungible.

It refers only to the equivalence of each unit of a commodity with other units of the same commodity. Fungibility does not describe or relate to any exchange of one commodity for some other, different commodity.

Etymology

The word comes from Latin fungibilis from fungi, meaning "to perform", related to "function" and "defunct".

Fungibility versus liquidity

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.

Examples:

• Cash is fungible: one US$10 bank note is interchangeable with another.
• Crude oil is fungible: a barrel of West Texas Intermediate crude oil is fungible (direct exchange) with another barrel of the same type and grade of crude oil.
• 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 fungible because diamonds' varying cuts, colors, grades, and sizes make it difficult to find many diamonds with the same cut, color, grade, and size.

Fungibility does not imply liquidity, and liquidity does not imply fungibility. 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 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.

Other Uses

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 his 2005 book, The World Is Flat, Thomas Friedman discusses the fungibility of jobs that involve digitizable information that can be off-shored to another country. "You do not want a fungible job," he maintains.

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.