This section provides a critical examination of the two most prominent “inductive” theories of the era concerning the relationship between gold and prices. Michael A. Heilperin subjected the work of Professor Gustav Cassel and Professor Charles Rist to a rigorous critique, finding both “wanting.” His deconstruction reveals not only the flaws in their specific conclusions but also the deep methodological weaknesses that plagued the quantitative economics of the period.

4.1 Professor Cassel’s Theory: An “Arithmetic Exercise”

Professor Gustav Cassel’s influential theory sought to establish a direct, quantifiable link between the world’s gold stock and the general price level. His methodology was built on the observation that the Sauerbeck index of wholesale prices was roughly the same in 1910 as it was in 1850. From this, he concluded that the growth rate of the world’s gold stock during this period—which he calculated at 2.8% per year (or 3% after adjustments)—represented the “normal” rate required to maintain stable prices in line with economic development. Any deviation of the actual gold stock from this normal trend (the “relative stock of gold”) was, he argued, the primary cause of long-term price fluctuations.

Heilperin systematically deconstructed this theory, which he dismissed as an “arithmetic exercise not conducive to acceptable conclusions.” His key critiques include:

• Arbitrary Period Selection: The entire theory rests on the “accidental fact” that a price index happened to be equal at two dates sixty years apart, with the 1850 starting point chosen from an exceptional price trough, a selection that renders the foundation of the theory highly tenuous.
• Flawed Statistical Tools: The theory relied on the Sauerbeck index, an unweighted average of prices. Such a construction, Heilperin argued, has no clear economic meaning, especially over a long period of profound structural change in the global economy. Comparing such crude averages across decades ignores the vast shifts in production, consumption, and technology that render the figures non-comparable.
• Unsupported Assumptions: Cassel’s independent calculations for the “rate of economic progress” were based on arbitrary statements, such as assuming the growth of pig-iron output was characteristic of all industrial development, and on pure “guesswork” for agricultural growth.
• Methodological Error: A fundamental flaw was the comparison of the world’s stock of gold to England’s price level. English prices depend on English monetary conditions, not directly on the global gold supply.
• Conceptual Inconsistency: Cassel’s work contained a central contradiction. He argued that long-term prices were determined by the supply of gold, yet simultaneously stated that under the gold standard, a currency’s value “depended entirely on the policy of the central bank.” These two claims cannot be reconciled without qualification, a weakness that undermines his entire thesis.

4.2 Professor Rist’s Theory: An Empirical Case of “Gold Mysticism”

Professor Charles Rist’s theory was exclusively empirical, eschewing a detailed causal mechanism in favor of an asserted correlation. His core belief was a form of “gold mysticism,” encapsulated in the statement that under the gold standard, “in reality it is gold which circulates, but through the medium of paper.” This assumption allowed him to bypass the complexities of the credit system and link price movements directly to the annual increase in the world’s gold stock. By comparing French price data with gold production figures from 1850 to 1914, he concluded that an annual increase in gold stock below 2.3% led to falling prices, while a rate above it led to stable or rising prices.

Heilperin found Rist’s statistical methodology to be even less defensible than Cassel’s. His primary criticisms were:

• Heterogeneous Data: Rist’s price curve was an illegitimate composite of three non-comparable segments: actual pre-war French prices, calculated dollar-based prices for the 1920s, and post-stabilization prices at a new gold parity.
• Arbitrary Trend Lines: To eliminate cyclical fluctuations, Rist used the “simplest and the least commendable” method of drawing straight lines to connect historical maxima and minima, a technique lacking statistical rigor.
• Unjustified Extrapolation: There was no theoretical or economic justification for assuming that the empirically derived 2.3% rate had any “permanent significance,” yet Rist used it to argue that the post-war price level was artificially high and that the deflation of the 1930s was a “normal” return to reality.

Ultimately, both theories failed to provide a credible explanation for the relationship between gold and prices. However, their diagnoses of the “great deflation” led to diametrically opposed policy conclusions.

The failure of these inductive theories demonstrates the need for a more robust framework grounded not in simplistic correlations but in a precise analysis of the mechanism of international payments.