Walloon, of course this type of set had been done in the theater. No one ever said it wasn’t!
Just popping in to say that this is one of my favourite early films.
Another myth is that “the authorities” demanded that the writers’ original ending be changed so that authority would not be questioned. In fact, the ending was changed by producer Erich Pommer and director Robert Wiene, on their own volition. Recommended reading: Beyond Caligari: The Films of Robert Wiene by Uli Jung and Walter Schatzberg.
I’ve also got the recent Kino Metropolis re-release…looking forward to watching this, too.
I at first had the same interpretation as Lamia and Trigonal, but…
Cesare is alive, and looks and behaves differently in the asylum. This belies the idea that Francis is sane and telling the truth. However, I think the alternate ending works despite this. The impact of the film is so powerful, that it causes you to wonder if Caligari really did commit the evil deeds despite the evidence of Cesare’s behavior in the asylum. The expressionist insanity of most of the film makes the objective reality of the ending questionable, even if you are aware of what is happening. I find this very interesting; more interesting than the original ending by far.
It’s kind of fun, writing these mysterious black box posts. 
More about the end of the movie:
You’re right. Cesare’s presence suggests that Francis is not altogether sane or at least that his story was not wholly accurate, but I think the true brilliance of this ending is that even this evidence is inconclusive. That’s a big part of why it works so well. It’s not a tidy “Oh, he was nuts all along so the whole thing was fake!” twist-ending. It’s an ending that suggests “He’s mad…probably. But if he is, was he before his experiences with Dr. Caligari? Is there any truth to his story at all?”
I think if someone really wanted to argue for Francis’s complete sanity they could speculate that Dr. Caligari may have the ability to resurrect Cesare or something, but I think that’s pushing it. I personally think that at best Francis was once perfectly sane but his confinement in the asylum unhinged him. In that case his account of events might be roughly accurate, but he confuses his experiences and acquaintances inside the asylum with those from before his confinement. At worst, he was truly mad the whole time and nothing he says about Dr. Caligari is true…unless, perhaps, he is right about the doctor’s character even if wrong about his deeds…