Today, I’m taking a break from my demography of Middle-Earth series to tackle a problem in my chosen field of study–economics. More specifically, today’s post is about the macroeconomic impact of Smaug, the red dragon of Erebor, on the economy of Middle-Earth.

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Surprisingly, there already exists a sizable literature on this subject.

To summarize, the consensus is that the arrival of the great wyrm of the North was both a fiscal and monetary shock: fiscal, due to the enormous damage to the productive capacities of the people of Middle-Earth (the destruction of Dale and Erebor, the roasting and consumption of countless skilled Dwarven miners and smiths); and monetary, because of the abrupt removal of the biggest hoard of currency in Middle-Earth.

How big a hoard, you might ask?

According to one calculation, Smaug is more than 60 meters long, and has a wingspan of over 50 meters–by all measures, an impressive beast. But those who have seen the movie know that Smaug is easily dwarfed by his massive bed of gold and jewels; he’s able to lie completely hidden beneath his treasure hoard. And recall that in the film the Dwarves’ plan to rid themselves of the dragon involves <spoiler>drowning him in a pool of molten gold</spoiler>

Now, by one estimate, the sum total of all the gold mined in human history would form about a 25 meter cube, with a value of over $12.4 trillion dollars (using the present gold price of roughly $1240 USD per ounce). The treasure hoard of Smaug is many times that size, making the wealth of the dragon many times greater than the modern United States’s annual GDP! And that’s just considering the value of the gold; once you factor in the value of the countless jewels and gems of his hoard, Smaug’s wealth simply becomes incalculable (Forbes, eat your heart out).

It’s easily conceivable that the massive shock to the money supply caused by the loss of the hoard started a deflationary spiral in the surrounding area, resulting in a severe depression in economic activity. No wonder the area around the Lonely Mountain was so desolate!

An interesting follow-up question would be the effects of the return of the hoard to Middle-Earth’s economy with the eventual slaying of the dragon. The re-introduction of such a vast amount of currency to the money supply would almost certainly have a massive inflationary effect on the surrounding economy–certainly not a welcome development for the people of Esgaroth and Erebor trying to rebuild their homes in the wake of the dragon. To borrow a phrase–out of the frying pan, into the fire!

If you liked this post, you might also like my posts on the populations of Gondor and Rohan.

  • Philip Solymosi

    Two things. First, if you look at pictures from Toliken the hoard is much smaller than in the movies. Second, since the hoard was a hoard before Smaug came, the following deflation wouldn’t be that big. If we assume that the dwarves didn’t spend that much gold and mostly to people from Dale, which was destroyed by Smaug, than the deflationary effect would be almost non-existent. And since the dwarves probably collected more gold from the ouside (for their services as smiths et cetera) we had deflation even before the fall of Erebor!

  • Peter Zoll

    The economy of Erebor has four or perhaps five components: it isn’t clear if there was much or any trade between the Iron Hills and everywhere else before Smaug visited. If there was commerce we can assume the dwarves of the Iron Hills wanted the same things those of Erebor did – food, pipeweed and alcoholic beverages like beer and wine. How much wood is locally available for the dwarves for paper, fires, charcoal, furniture and so on isn’t clear. Perhaps they needed to import
    lumber, clay (pipes, pottery …) and cloth as well. The Wood-elves are also trading for food and wine although at least some of their vintages come from Dorwinion. They could certainly export wood, but there’s no mention of anyone raising cotton, flax or other fibers. We can guess Dale functioned as an exchange point somewhat similar to Italian cities like Venice in the Middle Ages. So a question is what could elves export besides wood? And what goes to Dorwinion besides money? Dwarf products? If Dale and later Laketown take a cut of the trade and sell some surplus to the elves, dwarves and men, we can imagine they might buy tools, jewelry and toys from the dwarves. It is not obvious how much is bought from the Elves. So one mystery is where do the Elves get the money to buy amazing dwarven treasures and import wine vast distances? How much of the hoard was mined and refined by the dwarves and how much was from payments from Dale and the Elves?