It’s always interesting to watch a science fiction or fantasy movie and see how the characters deal with money. For example, in Star Trek IV when the crew travels back in time, there’s a scene where a woman (who obviously likes Kirk) mentions sarcastically that they probably don’t have money in the future. Kirk replies “we don’t”. Some stories put money or trade front and center. In the movie In Time, currency is the amount of time you have left to live. If you’re very rich, you essentially live forever. When you run out of time to spend, you die. In Dune, everyone is obsessed with the spice melange, which acts as a store of value for the major houses competing with each other.
But what about our beloved Middle-earth? I don’t recall anyone exchanging any money in the Lord of the Rings books, or in the movies. But in The Hobbit, the whole story starts with Thrain’s obsession over gold. The dwarves mine gold and gems from the mountain, and Thrain loves accumulating it. But gold is only useful in that it is pretty and rare. So you can wear it, but not eat it.
The dwarf economy before Smaug seems to subsist mostly on mining. They trade a portion of their precious metals and gems through Dale to the rest of Middle-earth for food and materials. And they appear quite rich and powerful, meaning the dwarves aren’t alone in coveting gold. That must mean there’s some precious-metal-based system of money used by the beings of Middle-earth. As guardian of one of the largest hordes of gold in the land, Thrain acts as a sort of central bank.
Now, the movies and book portray this as a sickness. Tolkien has some liberal tendencies in all his stories: In Lord of the Rings when Saruman replaces trees with the “fires of industry”, this is not generally viewed as a good thing. Better to care for “growing things”. But is Thrain really that terrible for not flooding Middle-earth with gold. Let’s say he went on a spending binge, drinking his way from Minas Tirith to the Shire, lavishing gold in every town he visited. Thousands for rooms, thousands to the poor, thousands for food, thousands for everyone! What would happen?
Middle-earth would have to adjust to rampant inflation. If you owned an inn on Thrain’s trek, you’d spend the gold as soon as you got it, knowing that a big devaluation was coming. Because wealth is not gold, it’s what we produce and consume. Gold is just the record-keeping system.
But then Smaug comes along and all spending stops. Who knows why Smaug needs all that gold (my guess is that dragons have a skin condition that gold soothes). In any case, with less spending, inflation turns to deflation. Prices go back to normal, and everything works out. But only if Middle-earth has no advanced system of credit.
Let’s say Middle-earth has a rudimentary system of credit. Maybe neighbors borrow from each other when they need some cash. When Thrain comes to town and prices are sky-high, you borrow 1,000 gold from a friend to pay for some food. Then Smaug takes Erebor, and the same food costs 1 gold again. And your income is 10 gold, but you still technically owe 1,000 to your friend. He knows this, so you agree to pay him back the new price of your food to reflect changing market conditions. It all works out.
But if there’s an advanced part of Middle-earth with banks and credit and laws to protect them, we might run into trouble. If Minas Tirith has a bank, and the steward enforces strict laws that enforce repayment or jail, your borrowing 1,000 gold at just the wrong time means you land yourself in prison. And the bank’s “asset” of 1,000 gold it kept on its books from your loan vanishes. In fact, most of the bank’s assets vanish because any loans taken out during Thrain’s binge are impossible to pay. Gondor itself could totter as no new loans are available and the economy collapses.
From this, it feels like we’ve lost something in our own financial advancement. Money is a tool to ease the exchange of goods. We latch onto certain forms of money because they are harder to manipulate. In the past gold was seen as a virtuous monetary system because the sovereign couldn’t devalue to pay for foreign adventures. We look back to gold now because we fear that our government can’t sustain its level of spending.
But the original concept of money isn’t as treasure. It’s an obligation we create in order to trade with one another (for an excellent book on what money is, try Felix Martin’s Money, the Unauthorized Biography). Some of us accumulate obligations in order to spend them later in life. Some of us become indebted to others in order to buy something now and repay it back over time.
Where things get tricky is when Thrain goes on a spending spree, or Smaug takes over the mountain. Our expectations of prices change, but in an advanced legal environment, our debts do not. Gold is not necessarily the best monetary base if you want predictability of social obligations (though you could perhaps make a case that it’s better than paper money). A crypto-currency like Bitcoin seems doomed as well unless it takes our collective expectation (or desire?) for slowly rising prices into account. In the meantime, we shouldn’t be like the Thrain of The Hobbit and horde for hording’s sake, because gold is not real wealth.