Tolkien wrote 'The Hobbit' as war propaganda, written expressly as part of the war effort and paid for with British taxes. Tolkien was recruited for Masterman's "War Propaganda Bureau" (1914-1917), though his distaste for the Ministry of Information's patriotic task is noted in his Letter 81. Tolkien was promoted by Masterman's 'Englishness' project which throughout the war years produced "English Classics" and war propaganda, the first to promote the English identity, the last to disparage German culture. "The Bureau, which operated under the supervision of the Foreign Office, was mainly directed at foreign targets, including Allied nations and neutral countries, especially (until 1917) the United States."
Tolkien invented the Hobbits to represent his own class: elite, wealthy, yet not directly involved in the culture wars being waged by the aristocrats (represented by elves) and the Jews (represented by dwarves). He was approached by a wizard (Charles Masterman, who headed the British War Propaganda Bureau) and pressured by a troop of Zionist Jews to create a great work of anti-German propaganda. To British elites, Smaug represented America sitting atop the world's wealth. Esgaroth (or Lake Town), which Tolkien modelled after Alpine villages, represented Germany. The pivotal moment of The Hobbit was when Smaug (America) was tricked into attacking Esgaroth (Germany). After the destruction of both Smaug and Esgaroth, the dwarves and the elves immediately began to fight over the spoils.
The Ring Trilogy was created to narrate the next campaign of war propaganda, the Cold War against the Soviet Union. The 'Lord of the Rings' story is an obvious reworking of 'Der Ring des Nibelungen' for an English audience, with the Rheinland replaced by Mordor. Tolkien subsequently rewrote parts of 'The Hobbit' to alter his originally childish magic ring to match the explicitly allegorical ring of 'Der Ring des Nibelungen'. When Tolkien claimed "I cordially detest allegory in all its forms", I imagine he meant that he did not want to discuss his allegories, not that he didn't employ them. When Reagan called the USSR 'The Evil Empire', the mass media was quick to draw parallels with Tolkien's Mordor.