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, integrating the pivotal role of banking in production and exchange. It uses transaction-flow matrices to dynamically trace financial flows among all market participants and compares the systemic outcomes under three distinct monetary architectures: (1) the Euro system with a common currency; (2) the Bancor system with a supranational currency; and (3) the Dollar system with a national reserve currency. While reaffirming the Ricardian gains from comparative-advantage-based specialization, the paper reveals how different monetary systems shape trade outcomes. The Euro and the Bancor systems do not inherently generate trade imbalances. In contrast, the Dollar system imposes an asymmetric demand for the reserve currency, which must be earned through net exports. Consequently, persistent trade imbalances are an intrinsic feature of the Dollar system.