Bilbo Baggins had returned to the Shire from his adventure at Erebor, he passes his possessions to his younger nephew, Frodo Baggins. Besides the beautiful hole at Bag's End, Frodo also inherits Bilbo's secret magic ring. The wizard Gandalf suspects that it is not an ordinary ring and, for almost 25 years, he visits Bags End on and off. .
Finally, he tells Frodo of the Making of the Rings of Power, and Sauron, the Dark Lord, who created the Master Ring to rule all other Rings. Sauron was defeated centuries ago by a Last Alliance of Elves and Men. After Sauron had been defeated by Elendil and Gil-Galad, Elendil's son, Ilsildur, took Saurons master Ring. After Isildur had been ambushed, the Ring was lost for many years. Until it came into the possession of the creature Gollum, who, as has been told in the Hobbit, lost his Ring to Bilbo.
Gandalf proves the Ring to be the One Ring by putting it into the fire of the hearth at Bag's End. Flaming letters appear on the Ring saying "ash nazg durbatuluk, ash nazg gimbatul, ash nazg thrakatuluk, agh burzum ishi krimpatul", which means "One Ring to rule them all, One Ring to find them, One Ring to bring them all and in the darkness bind them". Frodo is in the possession of the Master Ring and the Enemy is coming for him.
Gandalf advises him to leave the Shire within a few months. Samwise Gamgee ("Sam") is involuntarily appointed to be his travelling companion. Gandalf has business to attend to, and leaves. But at the moment agreed, Gandalf does not return. Frodo leaves the Shire, so to say "to live in Crickhollow", a place in the east of the Shire. During their journey through the Shire they encounter an evil Dark Rider, who almost discovers them, save Frodo and his company are saved by a group of passing Elves (leaded by Gildor). They venture forth through the fields of Farmer Maggot, who is an old "acquaintance" of Bilbo. They reach Crickhollow safely.