During the early 20th century, two major theories attempting to establish a direct, quantifiable link between the world’s gold supply and the general price level gained significant influence. Proposed by Professors Gustav Cassel and Charles Rist, respectively, these theories provided the intellectual ammunition for disastrous policy choices in the 1920s and 30s, making their flaws not just an academic footnote, but a matter of immense historical consequence. Understanding their foundations is essential for evaluating the historical “gold problem” and the challenges of monetary management.

3.1 Professor Cassel’s Theory: The “Normal” Rate of Gold Increase

Professor Gustav Cassel’s theory is an attempt to define a “normal” rate of increase in the world’s gold stock that would be sufficient to maintain a stable price level in a growing global economy.

His methodology was to select a historical period where the general price level was the same at the beginning and the end. He chose the period 1850-1910, noting that the Sauerbeck index number (a widely used, unweighted index of British wholesale commodity prices) stood at 77 in 1850 and 78 in 1910. He reasoned that over this 60-year span, the growth in the gold stock must have been, on average, exactly what was required to support general economic development without causing net inflation or deflation. By calculating the growth of the world’s total gold stock over this period, he arrived at an average annual increase of approximately 2.8%. Adding 0.2% for wear and tear, he concluded that a ~3% “normal” annual increase in gold stock was necessary for price stability.

From this, he argued that long-term (“secular”) variations in the price level were caused by deviations of the actual gold stock from this “normal” growth path. Heilperin subjects Cassel’s theory to a systematic critique, finding its very foundations to be unsound.

1. Arbitrary Time Period: The entire theory rests on the accidental fact that a crude price index happened to be at nearly the same level in 1850 and 1910. The choice of these specific dates is arbitrary. Cassel could just as easily have chosen 1884 (index at 76) or 1906 (index at 77). Building a universal law upon such a coincidental and arbitrary statistical starting point is a fundamentally flawed methodology.
2. The Fallacy of Comparing Price Indices Over Time: Comparing crude price averages over a 60-year period of profound structural change is economically meaningless. The period from 1850 to 1910 saw revolutionary changes in technology, production methods, consumer tastes, and the very composition of the global economy. To assume that an unweighted average of commodity prices has the same significance in 1910 as it did in 1850 is to ignore the complete transformation of the underlying economic reality that those prices represent.
3. Critique of the “Rate of Economic Progress”: Cassel’s independent calculation of a 3% “rate of economic progress” is based on equally arbitrary assumptions. He uses the growth of pig-iron output as a proxy for all industrial development and makes a guess about the rate of agricultural development. He then combines these figures using an arbitrary weighting (assuming food represents one-third of social income). This attempt to represent the complex, heterogeneous process of global economic development with a single, simplistic figure is a hopeless and misleading effort.
4. Inconsistent Logic: Cassel’s work contains a significant internal contradiction. On the one hand, his gold theory argues that the physical supply of gold is the primary determinant of long-term price levels. On the other hand, in his analysis of central banking, he correctly states that under a gold standard, currency becomes a “‘managed currency’, whose value depended entirely on the policy of the central bank.” These two positions cannot be reconciled. The existence of a managed currency system with central bank discretion fundamentally breaks the direct, mechanical link between gold supply and prices that his primary theory requires.

3.2 Professor Rist’s Theory: Empirical Correlation and Gold Mysticism

In contrast to Cassel’s quasi-mechanical model, Professor Charles Rist’s theory is purely empirical and leans toward a form of gold mysticism. Rist argues for a direct, almost magical, link between gold and prices, dismissing the role of central bank policy, such as the discount rate, as a secondary factor. For Rist, notes and cheques are merely the outward appearance of a system where gold is the true circulating medium. In his words:

“in reality it is gold which circulates, but through the medium of paper.”

This view is fundamentally at odds with the modern understanding of a “de-materialized” monetary system, as it ignores the vast superstructure of credit created by banks.

Rist’s methodology involved comparing a curve of French wholesale prices (reduced to “gold prices”) with the curve of the yearly percentage increase in the world’s gold stock from 1850 to 1914. By drawing crude trend lines connecting the peaks and troughs of the price curve, he observed a correlation: prices tended to rise when the annual increase in gold production was above 2.3% and fall when it was below that level. This 2.3% figure is presented as a purely empirical finding, without the theoretical justification Cassel attempted for his 3% rate. The methodology is highly questionable due to the arbitrary method of constructing the trend lines and the unsubstantiated significance of the 2.3% rate.

Based on this historical correlation, Rist extrapolated into the post-WWI era. He argued that the fall in the rate of gold production after 1911 meant that the high price levels of the 1920s were artificial and unsustainable. His conclusion regarding the “Great Depression” was that the catastrophic price collapse was not an anomaly but a “normal” and necessary return to a level dictated by the “nature of things”—that is, a price level consistent with the underlying reality of the world’s gold supply.

In comparing these two influential theories, we must focus on their diagnoses and policy implications. Cassel’s implication is that the volatile physical supply of gold makes the gold standard an inherently flawed instrument for achieving price stability, which logically leads to an argument for a managed paper currency. Rist’s implication, by contrast, is that the physical supply of gold represents an immutable economic law to which prices must adjust, thereby justifying even a catastrophic deflation like that of the Great Depression as a “normal” and necessary correction. While their technical analyses differed, Heilperin finds both fundamentally lacking because they fail to account for the indirect, institutionally-mediated, and indeterminate relationship between gold reserves and the actual circulating medium in a modern banking system. They mistake statistical correlation for causation and ignore the crucial role of monetary policy and institutional structure.