Money is ... What?

Money is fungible. That certainly sounds sophisticated. I might—indeed I’m almost forced to—consider that very word, all by itself, to be a sign of sophistication. So if someone trots out a definition of money like that, he must seem doubly smart. The odd thing with fungible is that it points to a triviality. Next, that it isn’t actually true, at least not over time. So let’s see what it means.

The word’s literal meaning is “capable of being used in place of another.” Taken literally, this translates into saying that “money is capable of being used in place of money,” which, to be sure, is true enough, but, if so, why bother with the definition. We already know that money is, ah, money. But what the sophisticates have in mind is something else. Let me illustrate that by using another something that is also fungible. Crude oil is fungible. To make this meaning plane, let me put it this way. Somebody knocks on your oil well door and says: “Can you lend me a barrel of crude?” It’s a friend, and you say “Sure.” Out goes the barrel of crude. A couple of weeks later a pickup pulls up. It’s your friend. Two of his helpers are rolling a barrel toward your oil well’s door. It’s full of crude oil. One glance tells you that. Now when you lent that first barrel, you did not take an exhaustive chemical analysis of the crude. So now you don’t bother repeating that analysis to make damned sure that the barrel you lent is actually still the same oil. Oil is oil. And money is money. Both are fungible, meaning functionally the same. Not surprisingly, our word function derives from fungi, thus “to perform, execute, or to discharge.”

Stupid definition, but if you fancy yourself an economist, at one point in your life at least, that phrase must come out of your mouth. This is my occasion. The $10 bill you lend, when the $10 is returned, does not have to be the same bill. Indeed it could be two fivers or some combination of other bills or coins amounting to ten.

Now to my second point. It turns out that this definition is not strictly speaking true—unless the exchange takes place over a very short time. Fungibility applies much more appropriately to crude oil or wheat or barley or pork bellies than to money. Money retains its nominal value, not its purchasing value. In deflationary periods it gains, in inflationary periods it loses value. It is for this reason that the sophisticates of the world are urging Europe to print money in efforts to stem the tide of the Euro Debt Crisis. It takes sophistication to know that inflating money robs somebody of purchasing power—but money is fungible. Therefore you pay your $10 debt, if you pay it later, with a bill that’s only worth $9.45. There is a real gain here of 55 cents. Multiply that by billions—and that’s real money.