Fungibility

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution. Examples of highly fungible commodities are crude oil, wheat, orange juice, precious metals, and currencies.

It refers only to the equivalence of each unit of a commodity with other units of the same commodity. Fungibility has nothing to do with the ability to exchange one commodity for another different commodity. It refers only to the ease of exchanging one unit of a commodity with another unit of the same commodity.

Etymology

The word comes from Latin fungibilis from fungi, meaning "to perform".

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, and sizes make it difficult to judge the value of one diamond against the value of another.

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 Aid

A foreign aid or lending policy that focuses exclusively on project financing may have unintended consequences (Devarajan & Swaroop, 1998). Aid intended for crucial social and adequate resources to crucial sectors is sometimes (only) a substitute for spending that recipient governments would have undertaken anyway. Since the government gets now external funding, it sees its own (originally appropriated) money freed up and may use it for other purposes. In this case, aid money is fungible. Even though aid and the original appropriated domestic funds had the same purpose (which thus would have boosted spending on the specific social policy or so) as they both are tied to this purpose (and thus not fungible/substitutable with other funds, e.g. for military expenditures), the recipient government can redefine the purpose of its own funds (but not the purpose of the aid money), redirect its own money and thus restore Fungibility (at least to the amount of the external aid). For an interesting paper, cf. Devarajan and Swaroop (1998).

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 as a remedy for breach of contract, instead of the more favored remedy of monetary damages.