It’s relatively common knowledge in the Silmarillion fandom that the Dwarves were created by Aulë. Eru, instead of punishing him for his disobedience, allowed the fathers of the Dwarves to live, but set them to sleep so that they would awaken later than the elves. All of this makes for an interesting story.
It’s also deeply rooted in in-universe anti-Dwarven racism.
There’s no reason to believe the story is false entirely, but buying into it has a lot of deeply disturbing connotations. First of all, it isn’t a Dwarven creation myth. The Dwarves themselves never express any such belief. The explanation is given in the essay Concerning the Dwarves, in The War of the Jewels:
Here are the words of Pengolod concerning the Naugrim. The Naugrim are not of Elf-kind, nor of Man-kind, nor yet of Melkor’s breeding; and the Noldor in Middle-earth knew not whence they came, holding that they were alien to the Children, albeit in many ways like unto them. But in Valinor the wise have learned that the Dwarves were made in secret by Aule, while Earth was yet dark; for he desired the coming of the Children of Iluvatar, that he might have learners to whom he could teach his crafts and lore, and he was unwilling to await the fulfilment of the designs of Iluvatar. Wherefore, though the Dwarves are like the Orcs in this: that they came of the wilfulness of one of the Valar, they are not evil; for they were not made out of malice in mockery of the Children
This is significant for a couple reasons. First, as in the Quenta Silmarillion, Tolkien is very clear that this explanation of Dwarven origins comes from a potentially fallible third party - in this case Pengolod(h), who has never seen a dwarf in his life. Second, the tale of Aulë and the Dwarves was not known in Middle-earth. This means that the Dwarves themselves must never have expressed it, because there aren’t any Dwarves in Valinor (well, there’s one, but that’s much later). This is not a story that they take pride in. And it’s not indicated that this information is coming from Aulë himself. If anything, it’s implied that he kept it a secret. Finally, we see the direct link between the creation myth and the belief that the Dwarves are lesser beings than Elves or Men. They may not be evil, like orcs, but they’re not on the same level. This is reinforced in the Silmarillion itself, which calls them “Eru’s step-children.”
The same quote -almost exactly - appears in The Lost Road, with some important differences.
“… There was at that time no enmity between Elves and Dwarfs, but nonetheless no great love. For though the Dwarfs did not serve Morgoth, yet they were in some things more like to his people than to the Elves.
The Naugrim were not of the Elf-race nor of mortal kind, nor yet of Morgoth’s breeding; and in those days the Gnomes knew not whence they came. [But quoth Pengolod it is said by the wise in Valinor, as we have learned since, that Aule made the Dwarfs while the world was yet dark, desiring the coming of the Children of Iluvatar, that he might have learners to whom he could teach his lore and craft, and being unwilling to await the fulfillment of the designs of Iluvatar. Wherefore the Dwarfs are like the Orcs in this, that they come of the wilfullness of one of the Valar; but they were not made out of malice and mockery, and were not begotten of evil purpose. Yet they derive their thought and being after their measure from only one of the Powers, whereas Elves and Men, to whomsoever among the Valar they chiefly turn, have kinship with all in some degree. Therefore the works of the Dwarfs have great skill, but small beauty, save where they imitate the arts of the Eldar; and the Dwarfs return unto the earth and the stone of the hills of which they were fashioned.”
Here, it is very explicitly stated that the fact that the Dwarves were made by Aulë, and Aulë only, means that they’re not real people. They are incapable of achieving true beauty in their art, unless they’re copying the Elves. They don’t have immortal souls, unlike Elves or Men. And this makes them akin to Morgoth, a.k.a. the source of all evil. This belief shows up later on in The Lost Road as well:
“…but it is not thought that they would have refused to smithy also for Morgoth, if he had need of their work, or had been open to their trade.”
It’s very hard to escape the conclusion that the commonly accepted origin myth for the Dwarves is used in-universe to discredit Dwarven accomplishments and portray them as subhuman. Their species is an accident, an aberration, and they’re never going to be as worthy as the real people. It’s a clear propagandistic attempt to justify the horrific treatment Dwarves face at the hands of Elves. And sometimes I get tired of seeing cutsey fanart or headcanons about Aulë and his children.
A+. I have a completely different headcanon for dwarvish origin stories myself (they have several myths, all given equal weight), partially because this myth is just so… convenient. It justifies elvish attitudes towards dwarves without really requiring a second thought. Why would any self-respecting dwarf deliberately take up the label of “inferior creation” and “sub-being”? How do you base a sustainable culture around that? The elves have their motives! We know the elves repeatedly say in their stories that they’re first, most special, in fact, the special-est. It’s an important part of elven mythos, to be first, to be deliberate, to be different from all the others. That says more about elves than it does about humans, dwarves, or hobbits.