@twoleftears - I think you are correct, in that the first two channel recordings were by comparison to later recordings simply using the two channels to achieve instrument placement in a single dimension across the image. Then sound engineers discovered instruments could be "located’ in two dimensions, i.e. front to back also.
then some artists, using a technique called phasing, are able to fool us into thinking the sound is behind us.
However, based on my own observations, it would appear that recording two channels very accurately captures the venue acoustics, i.e. those little reverberations and echoes off the ceilings and walls, which seems to "fool" our senses into hearing height. Perhaps height is not the right term, maybe it’s more a "sense of space", in particular, a large space..
So if we can reproduce the recorded signal "accurately" we should be able to recreate the recorded image, complete with its sense of space - yes?.
I’ve only recently become aware of this "effect", thanks to the cables I now have in my system. They are DIY and so over the course of their development, I became increasingly aware of how the details of the venue acoustics improved with each version of the cables and how those reverberations and echoes played a role in recreating the image with amazing reality, i.e. sense of space.
With the advancement in recording technology and the also audio equipment, I believe three dimensional sound using two channels is now a reality. You just need the right gear.
I don’t know if any system is capable of achieving your "Flamenco Challenge", mainly because audio enthusiasts spend a lot of time trying to get rid of reflected sound adn perhaps we need to utilize an element of that. But as we learn more about this hobby I can see a day when your challenge will be a achieved.
If you happen to have the name of such a track - I would be interested hear it on my system, which I believe has an innate sense of space.
Regards - Steve