The dwarves of modern fantasy stories tend to be associated with Norse culture, but the dwarves of Tolkien’s Middle Earth were inspired by another ethnic group:
We have, then, a bunch of short, bearded beings exiled from their homeland, who have dreamed forever of returning. They are linked to a place they lost long ago, dwell in other realms throughout the earth, and yet are so profoundly connected to their own kingdom that it remains vivid to them while for others it is a fading memory. There is one tribe that offers a perfect real-world parallel to Tolkien’s dwarves; there is only one nation that has remained existentially linked to the kingdom its people lost long ago even as it mingled among kings and queens and common folk of other lands throughout history: the Jews. In a reflection on Tolkein and the Jews, to which this essay is indebted, Rabbi Jeffrey Saks notes that the dwarves’ “sorrowful song of longing to return to their homeland might have been lifted from a Middle Earth Kinnot Tisha B’Av” — a reference to the lamentations read by Jews when they mourn the destruction of Jerusalem.
The dwarves of Middle Earth, the central characters of one of the most beloved books of all time, are indeed based on the Jews. This was confirmed by Tolkien himself in a 1971 interview on the BBC: “The dwarves of course are quite obviously, [sic] couldn’t you say that in many ways they remind you of the Jews?” he asked. “Their words are Semitic obviously, constructed to be Semitic.” Similarly, in a letter to his daughter, Tolkien reflected, “I do think of the ‘Dwarves’ like Jews: at once native and alien in their habitations, speaking the languages of the country, but with an accent due to their own private tongue.”
This passage from The Hobbit takes on a different tone once you see the parallels:
The most that can be said for the dwarves is this: they intended to pay Bilbo really handsomely for his services; they had brought him to do a nasty job for them, and they did not mind the poor little fellow doing it if he would; but they would all have done their best to get him out of trouble, if he got into it….?There it is: dwarves are not heroes, but calculating folk with a great idea of the value of money; some are tricky and treacherous and pretty bad lots; some are not, but are decent enough people like Thorin and company, if you don’t expect too much.
Tolkien himself was no anti-Semite though. Here’s his response to a German publisher inquiring into his racial background before taking on The Hobbit:
I am not of Aryan extraction: that is Indo-Iranian; as far as I am aware none of my ancestors spoke Hindustani, Persian, Gypsy, or any related dialects. But if I am to understand that you are enquiring whether I am of Jewish origin, I can only reply that I regret that I appear to have no ancestors of that gifted people. My great-great-grandfather came to England in the 18th century from Germany: the main part of my descent is therefore purely English, and I am an English subject — which should be sufficient. I have been accustomed, nonetheless, to regard my German name with pride, and continued to do so throughout the period of the late regrettable war, in which I served in the English army. I cannot, however, forbear to comment that if impertinent irrelevant inquiries of this sort are to become the rule in matters of literature, then the time is not far distant when a German name will no longer be a source of pride.