I find startling similarities between this chapter and Joseph Conrad's novel Heart of Darkness, which many of you know better in its movie incarnation, Apocalypse Now.  Bilbo literally travels into the heart of darkness, where he meets a horrifying cannabilistic creature of darkness, a creature all the more horrifying because in many ways he is, or was at one time, similar to Bilbo himself.

Indeed Gollum was, I would argue, even more similar to Bilbo in the 1937 edition than in the revised version.  In both versions, the riddles make clear the similarities.  Gollum and his friends and family used to live in holes by a river, and he was familiar not only with riddles, but with the sun on daisies, and with robins' eggs.  (Note, by the way, Tolkien's little joke with a hoary phrase -- Gollum literally did teach his grandmother to suck eggs!)  In both versions, Tolkien's reference to the fish that wandered into the underground lake and whose "eyes grew bigger and bigger and bigger from trying to see in the blackness" hints that at one time Gollum's eyes were more like Bilbo's. 

Furthermore, in the 1937 version, Gollum did not seek the heart of the mountain, but retreated there after the goblins cut him off from his friends -- which is exactly what has just happened to Bilbo!  In the original version, Gollum was a cannibal, but still had a strange sense of honor, and honored his debt to Bilbo.  Indeed in the original version it is Bilbo who might be accused of cheating, since he does not reveal the fact that he has Gollum's prize, and that Gollum does not exactly owe him a dangerous trip to the cave entrance.

Finally, in both versions Gollum and Bilbo share the ring -- Gollum as the previous owner, Bilbo as the present owner.  In both versions the ring offers invisibility.  And yet in the 1937 version, Gollum never attempted to rejoin his friends, despite his ring of invisibility.  Why not?  He can match Bilbo's wits, he can sneak up on goblins from behind as well as any silently moving hobbit, but he lacks Bilbo's courage.  Gollum is a foil for Bilbo, or a picture of what Bilbo would become if he lacked courage.

In the revised version, Gollum is also a foil for Bilbo, and later for Frodo, but Gollum reaches the crossroads in his life before he enters the Mountains, back when he first saw the Ring.  In the 1937 version Gollum reached the crossroads when he was cut off from his friends.  Gollum lacked the courage to brave the entrance, and slowly evolved into something horrible, a monster.  But that monster, or the potential to become such a monster, lurks in the dark recesses of Bilbo's pysche.  As Kurtz says in Heart of Darkness and Apocalypse Now, "The horror, the horror."

What is Tolkien's point?  Perhaps that the most horrifying monsters are those who, in some dark way, resemble our secret selves, or what we fear we could become.  But this chapter also highlights that despite Bilbo's tremendous luck in finding the ring of invisibility, luck is what you make of it.  Bilbo could have use the ring for good or for ill.  The fact that he courageously uses it for good makes him a genuine hero, despite his tremendous luck.

Bilbo goes into the mountain quivering with fear, and comes out a Burglar, with a capital "B."  It is not just his discovery of the ring that transforms him, but how he copes with being alone and cut off from his friends.  He faces his deepest, darkest fears, and passes through them by using his luck, his wits -- and his courage.

There is a counterpart to this chapter in LotR.  It is Frodo's experience in the Barrow-mound, confronting the Barrow-wight.  Frodo struggles in the darkness with his temptation to use the ring to hide, deserting his friends, but finds his courage, and chooses a different path. 

The imagery Tolkien uses of death and rebirth, of a trip into the heart of darkness, is familiar to us from psychology, but long before psychology it was a familiar part of mythology.  And I do think Tolkien uses such imagery consciously, not as an allegory, but as an extended metaphor.  In the story, Bilbo is literally confronting his darkest fears -- but the story also functions as a metaphor for the reader, a metaphor about confronting dark fears.  I am not pretending to psychoanalyze Tolkien here, by the way.  Instead I am making an analysis based on Tolkien's text about Bilbo's psyche, as Tolkein reveals it to us.  Whether Tolkien used this imagery because he was familiar with pyschological theories, or because he and the psychologists were using the same mythological source material, is unclear.  It is clear, however, that this chapter marks Bilbo's transformation into the hero of the tale.

“I dislike Allegory - the conscious and intentional allegory - yet any attempt to explain the purport of myth or fairytale must use allegorical language.  (And, of course, the more 'life' a story has the more readily will it be susceptible of allegorical interpretations: while the better a deliberate allegory is made the more nearly will it be acceptable just as a story.)” (From Tolkien Letter # 131.)