We’ve heard this word a lot lately — usually with a negative connotation.  Fungible is used in economics usually to refer to money, although it may also be used to refer to any item that is freely exchangeable for an identical amount of the same product.  The $10 bill that I have is exchangeable for your $10 bill.  But it’s more subtle than that…

If we both put a $10 bill on the table, and mix them up, you can’t tell which one was mine or yours…assuming you didn’t memorize your serial number.  The point that is being made in today’s economy about “money being fungible” is usually used to beat-up on the banks and financial institutions that have received government assistance (did someone say “bailout”?).  A lot of folks are making a big deal about banks that are paying big year-end bonuses after receiving billions of dollars.  The banks are saying, hey, no taxpayer money was hurt in the making of these raises.

Well, here’s the thing…we can’t be sure.  The fact is that once a million goes into the coffers of the bank, you can’t tell one dollar from another.  If  two one-million-dollar deposits come in the front door, it’s impossible to tell which money was paid as a bonus, and which money paid the rent.

One of the principles of money as fungible is precisely the point here…you can’t tell if the money that was brought in the front door by the truckload is the same money going out the back door as bonuses.  If your local soup kitchen had a case of oranges donated, and you found a case of limes at the CEO’s house, could you tell where they came from?  Well, you could be sure that they weren’t the oranges that were donated.  Can you same the same thing about the $175 billion that went to AIG and the billions that went out in bonuses?  Nuff said.

UPDATE: If Bernard Madoff’s wife had no savings when they got married, worked for a firm that was a giant Ponzi scheme, and was paid a salary over 20 years by that $65 billion fraudulent company, then told the judge,
“Hey, $69 million of that money is mine — separate property — and should not be seized by the Feds to pay off all of those who lost their life savings”…

If you heard this story at a cocktail party, would you laugh at her or be sympathetic?  If you would laugh at her (il)logic, you understand that money is fungible.