Re-reading the Hobbit, it almost feels like a distinct setting from LotR's Middle-Earth

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So Bilbo and the hobbits were the ones telling stories of dragons and princesses? That would fit, in-world.

One thing that Tolkien does within his stories is alter his language based on the speaker or viewpoint character. It's not only a matter of dialogue, where characters of different educational backgrounds speak differently, it's that depending on what is framing the story he will use totally different language as a narrator. Depending on who is talking or being talked about, his language could be Brother's Grimm, James Fenimore Cooper, Shakespeare, or the writer of Beowulf or the Viking Eddas. Move to Silmarillion and you also get stories told in the language of the King James Bible. In the case of The Hobbit, it's true you get a lot of the voice of George MacDonald.

I think The Hobbit is very much within the world of Middle Earth, but the voice of the author/narrator has changed to match the viewpoint character of Bilbo.

There are tales of dragons and princesses in Middle Earth, it's just the ones we have are so dark you don't tell them to your kids. The tale of Niënor and Glaurung is as darkest as the darkest of Greek tragedies. But Middle Earth is a big place with thousands of years of history. There is room in it for heroes who slay dragons and rescue princesses, and room in it for both the epic lays of elves and men and the folk stories of common folk. There are common folk in Gondor and they remember the stories in their own way, as the dialogue between Ioreth and her cousin shows us.

"Oft it may be chance that old wives keep in memory word of things that once were heedful for the wise to know.’"

UPDATE: One of the latest things that has really struck me is how much the stories are meant to be spoken word stories, recorded in oral tradition and using the oral tradition of the story-teller. Indeed, it's gotten hard for me to not hear certain passages in Tolkien's own gruff staccato voice. Tolkien's different voices almost reflect the different stages the story is being recounted on, whether in a grand court as a bard chants the tale to the noble audience or as a kindly grandfather relaying the story to his children. The Hobbit after all began as an oral story, and the LotR was as it was being composed, was relayed orally to the Inklings. Indeed, at one point Tolkien was despairing of getting LotR finished and published, and he was visited by some friends with an audio recorder who asked him to make a recording of a part of the book. Tolkien chose the charge of the Rorrihim at the Pellinor Fields, and afterwards his friends made him listen to it and said, "Surely you know, this is good."
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I had just forgotten just how different the world is in the Hobbit alone, compared to all of the structures that were constructed and published later.

Yes. One way to think of this is that in the 60 years between these two stories, the world changes.

The Hobbit takes place in a world in that is basically untouched by Sauron's power. There's sixty years that pass, in which Sauron grows in power and influence. Denethor and Saruman are corrupted after The Hobbit. Wormtoung come to influence Theoden after the Hobbit. When Bilbo meets them under the mountains, they are "goblins". As Sauron comes back to breeding them, they are reinvigorated to Orcs, and Saruman produced the Uruk-hai - all after the events of The Hobbit.

So, yes, the world of LotR is darker, because it has been touched by 60 years of Sauron's growing influence, to the point where it is about to fall to Sauron's darkness.

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