Central Banker: Smaug the Terrible
Ben Shelley | 27 March 2017

For those of you who have not read or seen any extension of The Hobbit, Smaug the Terrible is a dragon, a fire drake from the north to be precise. He resides in the lonely mountain to the east of Middle Earth. There, he guards the bounty of the defeated dwarves of Erebor. Upon an endless sea of gold, gems and commodities he hoards the vast riches that could otherwise be released into the economy of middle earth.


So what economic relevance does this have? How does this make Smaug a central banker? Smaug's plunder is estimated to be valued at tens of billions of US dollars. This is an estimate taken from Tolkein's artwork of the mountain's wealth. Using the extrapolation made by strange people on the internet, we can start to look at the monetary policies that Smaug is pursuing. For Smaug, in his hoarding of these riches, is pushing money tightening to the limit and saving Middle Earth from catastrophic demand pull inflation and geographical inequality.


With Smaug sitting on this gold, the general price level of the world of men stays at a sustainable and healthy level. When Smaug first arrived, however, he took a rather large amount of gold out of the money supply. Sixty years later, the effect of this may have diminished, however, there would still be the uncertainty over his presence and whether the gold was ever going to leave the mountain. The prospect of such a boost in the money supply would cause problems within any economy, for example, businesses could well hold back stock in order not to sell at the wrong price. Uncertainty is generated by the mountain as the fate of the gold is forever to be determined. It would seem that Smaug could well have done with a decent forward guidance policy much like our current governor, Mark Carney.


At the demise of Smaug, we see the return of the Dwarves of Erebor. Once in power, they use the gold to trade with the likes of men and elves and we see gold leave the mountain for the first time in almost seventy years. The men of the lake town are the first to benefit from this, as they seek to rebuild the ruins of Esgaroth as well as the Laketown that succumbed to the flames of the dragon. This would lead to a construction boom much like that from post-war Britain where many major cities that had been bombed began to rebuild their economies. This gold fuelled recovery would have had knock on effects across all neighbouring areas including the elvish kingdom of Mirkwood. It is likely the construction boom may have led to a more cooperative relationship in the north between dwarves, elves and men, as factors of production would have been required from all three races.


A parallel can be drawn between the Californian gold rush and the huge migration that would have occurred as the people of Middle Earth headed towards the mountain of treasure for a better life. Many of the migrants may well have originated from the land of Gondor. Badly paid individuals keen to improve their standard of living may have left the white city in search of increased prosperity. If this net migration was to become large enough, this would have caused the economy of Gondor to collapse as their labour force is pulled from beneath its feet. Overall, the world of men would have been politically unstable, on the verge of economic collapse and in no way fit for a war with Isengard or Mordor.


If it were not for the war with Sauron, Middle Earth may well have been thrown into turmoil by the turn of events put into place by the death of Smaug. The timing of the war of the ring saved Middle Earth from total destruction, as had it been any later, there would have been much less resistance to the conquest of Mordor. If Sauron's armies had just waited a little while longer they could well have met a much weaker and segregated Middle Earth, ensuring a victory for Mordor and its allies.

James Routledge 2016