38 years later, Dragon Quest creator says losing half of your money after falling in battle was intended as a kindness to get JRPG players on board with leveling up

gamesradar.com:

Dragon Quest series creator Yuji Horii has shared the thought process behind one of the JRPG's harshest long-running mechanics – losing half of your money after falling in battle – and it turns out that it was actually considered a kindness in comparison to how players could have been penalized. 

As reported by Otaku Soken (and translated by Automaton), Horii explained on a talk show that a lot of it boils down to the fact that RPGs and JRPGs weren't nearly as popular in 1986 – when Dragon Quest 1 first released – as they are now. That means that players were naturally far less familiar with the crucial mechanic of gaining experience in battles in order to level up, which they'd need to do to get stronger and take on tougher foes throughout their journeys. 

With that in mind, Horii clearly wanted players to see the virtues of leveling up, because no matter how many times they fell in battle, they'd never lose any progress made or experience gained – they'd be able to continue getting gradually stronger to get through the story. Losing half their money instead was an alternative, more gentle punishment for losing fights, with Horii noting that he "decided to keep the penalty at just that." 

Basically, it sounds like the incentive to level up was the reassurance that it'd never be a waste of time – a point that was more important to hammer home at a time when it was more common for some games to make you lose a lot of progress, or even start from scratch if you lost. Since the money-losing mechanic has been kept intact since the start of the Dragon Quest series 38 years ago, it now seems more harsh since holding onto your experience and levels is just the expected thing, but Horii was actually taking mercy on new JRPG fans at the time. With how popular Dragon Quest became, it clearly wasn't a bad idea at all. 

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