The Euro, The Bancor and The Dollar: A Ricardian Model

This paper extends the classical Ricardian model from a barter system to a monetary framework which emphasizes the pivotal role of the banking system in facilitating production and exchange. It studies international trade under three different monetary systems: (1) the Euro system, where a single currency facilitates both domestic and international trade; (2) the Bancor system, which relies on a supranational currency for trade between nations; and (3) the Dollar system, where one country’s national currency serves as the international media of exchange. The model preserves the Ricardian insight that specialization based on comparative advantage enhances global wealth, and identifies distinct features arising from different monetary systems. It shows that neither the Euro nor the Bancor system inherently generates trade imbalances. In contrast, the Dollar system imposes an asymmetric demand for the national currency used to conduct global trade. Since the currency demanded must be earned through net exports, trade imbalances are an intrinsic feature of the Dollar system.