Central Banking in Middle-Earth, or: The Much-Maligned King Thror


Watch out there, Bilbo, you’re about to slip into some Dutch Disease!

This is not a post about the inflation of Hollywood movie length, although The Hobbit (part 1 of 3, mind you) surely fits that trend (and some unfortunate others). If you want that, there are some reviews I can point you to. Instead, this is a necessary corrective to the flawed monetary theories embodied in The Hobbit.

The film opens with a compact 20-minute history of the Dwarvish kingdom of Erebor, a mining city sunk deep into the mountains. The narrator helpfully explains that the city and its neighbors exploded in wealth and prosperity as gold poured bountifully from the ground; beautiful sweeping shots show us implausible mining efforts quarrying deep into the heart of Middle Earth. But then the music, Law-and-Order-like, turns somber as we learn that King Thror grew perniciously greedy, hoarding the gold and refusing to distribute it equally. Naturally, karma, the gods, and the plot of The Hobbit demanded vengeance, and it came in the fiery computer-generated form of the dragon Smaug. The kingdom was shattered, the Elves refused to aid the Dwarves, and the basic dramatic tension of the book was set in place.

Sadly, this is all so very wrong. The supposed villain of this piece, Thror the hoarder, should be hailed as its hero. His economic policy, while on the surface avaricious, was in fact brilliantly advanced. He was the Paul Volcker of Middle Earth, and it’s time to clear the record.


Fed chair Ben Bernanke may have the whole Central Banking thing down…


… but he has a ways to go until he achieves Dwarfish beard magnificence

As gold poured into the Dwarvish economy it faced a dual threat: Dutch disease and hyperinflation. In the former case, the gains from trade Erebor would achieve by selling gold would lead to a stagnation of its famed metal-smithing and beard-braiding sectors as labor shifted from manufacturing into mining. Ereborian currency would surge in value abroad as international demand for the currency increased to purchase gold. Concurrently inflation would explode at home as the value of gold disappeared. At some point these two effects would be about a wash, but in the presumably illiquid international markets of Middle Earth these forces would clash dangerously, destabilizing the Ereborian economy even as it entrenched itself further into the unsustainable mining industry.


When I have the time, I’ll add a caption here that explains how this graph helps illustrate what I’m saying (Corden, 1984)

Fortunately, King Thror had a solution: a sovereign wealth fund, a la Norway’s. To fight inflation and Dutch Disease simultaneously, Thror pulled a Volcker and tightly controlled the gold and precious jewel supply by hoarding it. This fiat ceiling on private gold supply would help fend off mining’s monopoly of labor, thereby preserving industry, and preserve the value of the Ereborian Dollar. One monetary policy to rule them all, if you will.

Of course, the hoard of gold did lead to the whole dragon coming and engulfing everything the dwarves cherished in flame, but you can’t really blame Thror for not implementing NGDP targeting, can you?

We can’t all be as foresighted as ibn Khaldun.

Correction: A previous version of this post referred to an ibn Khardun rather than the illustrious historiographer, historian, sociologist, economist, theologian and historical personality of ibn Khaldun. We present our sincerest apologies to his ghost.

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6 Responses to Central Banking in Middle-Earth, or: The Much-Maligned King Thror

  1. Have you identified the Dragon yet?

  2. Pingback: Monetary policy in Middle Earth | Simon Taylor's Blog

  3. Colin says:

    Of course Thror’s reason for loving gold so much was the influence of one of the Dwarf Rings. These did not give Sauron control over a Dwarf, Dwarves were designed to resist Sauron’s former master after all, but it enhanced their natuaral love of precious things and turned it bad, with a soupcon of miserliness.

    What is your analysis of Sauron’s policies?

  4. Scott says:

    I think Smaug actually missed a golden opportunity (boom boom) to act as securities holder in the wider economy, sitting on a sovereign wealth fund as he was.

    In doing so he would have become a pillar of the banking and credit sector and the authorities would have dealt with Thorin’s dozen (ok not exactly a dozen but hey) as such bandits deserve.

    Smaug could have offered guarantees for lines of credit, increased his personal wealth, controlled supply and established law and order all at the same time… alas, like so many billionaires he grew fat and lazy and developed a soft underbelly…

  5. Pingback: Skepticlawyer » Bilbo baggage

  6. aahabershaw says:

    Reblogged this on Auston Habershaw and commented:
    I don’t usually reblog stuff, but I thought this was sufficiently hilarious (and insightful) to earn the right.

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