Schleiermacher had identified the hermeneutic circle in its grammatical form: every sentence must be understood in the light of the whole text, and every text in the light of its genre and context; but the whole is only accessible through the parts. Dilthey deepens this insight by grounding it in the structure of inner life itself. Just as we understand an individual life by grasping its dominant inner tendency — the way its parts cohere into a biographical whole — so we understand a historical expression by grasping the inner experience it expresses and the cultural whole within which that experience had its meaning. The circle is not just a feature of text-reading but of all historical understanding.
A logical circle is vicious when it presupposes what it is trying to prove. The hermeneutic circle is not vicious in this sense: each pass through it does not merely confirm what was already assumed but genuinely deepens and transforms understanding. I begin with a preliminary, partial grasp of both part and whole; I correct my understanding of the part in light of my emerging sense of the whole; I revise my understanding of the whole in light of the corrected part; and so on. The process has no absolute beginning and no absolute end, but each turn of the circle can be more adequate, more nuanced, more faithful to the expression being interpreted than the last. This is what interpretive rigour consists in.
Dilthey recognises that the interpreter never enters the circle from nowhere: she always brings a pre-understanding formed by her own experience, her own cultural horizon, her own historical situation. This pre-understanding is not an obstacle to be eliminated but the very condition of understanding — without it, the expression would be wholly alien and opaque. The task is not to transcend one's horizon but to become conscious of it, to hold it open and responsive rather than rigid and defensive, so that the encounter with the expression can genuinely challenge and enlarge it. Gadamer would later develop this insight, in explicit dialogue with Dilthey, into the doctrine of the fusion of horizons.
The hermeneutic circle is discussed in "The Rise of Hermeneutics" (1900) and "The Formation of the Historical World in the Human Sciences" (1910), both collected in Hermeneutics and the Study of History. Gadamer's Truth and Method (1960) is largely a critical engagement with and extension of Dilthey's hermeneutics.