Demand Deposits (8) - Fungible Goods

Some defenders of the modern banking system have argued that a bank is different from a warehouse, because money is fungible. A fungible good is one that becomes mixed when it is stored with more of the same good. An example is wheat. If my wheat is added to a silo containing wheat owned by other people, I will not be able to get my particular grains of wheat out. All that the silo owner is required to do is return any wheat of similar quality to what I put in a silo.

Oil is another example of a fungible good. Having a separate storage tank for each owner of oil would not be very efficient. It is better to store all the oil of a particular type in one tank. The operator of the tank will always be able to return oil to the person who put some in when he wants it, however he will not get exactly the same molecules of oil that he put. He will be quite happy as long as he gets oil of the same quality.

The defenders of the banks argue that money is a fungible good too. This is true. If you deposit gold coins in a bank, you may have an attachment to a particular coin, because you like the face that is printed on it, but most people will happy to get back any coin, as long it contains gold of the same weight and purity. Likewise, I don’t really matter what bank notes, I get when I with draw money from the bank, as long as they are not scruffy. I do not care, if I don’t get back the ones that I put in.