Thorin announces that it is time for Bilbo to earn his pay by investigating the interior of the Mountain and acting as a burglar. Bilbo replies, impatiently, that he has already saved the dwarves twice, but that he’ll go into the Mountain anyway, since he trusts his luck more than he used to at home. He asks for someone to accompany him into the Mountain; only Balin, who’s fond of Bilbo, volunteers. The narrator notes that dwarves are tricky, and not always very honorable. These dwarves, the narrator continues, intend to keep their promise and pay Bilbo handsomely for his services, but at the same time, they’re not necessarily willing risk their own lives to help him. Balin walks Bilbo into the Mountain, but eventually he hangs back and lets Bilbo proceed alone. Bilbo is afraid, but determined to go on—he has changed greatly since he left his home.
Bilbo is clearly enjoying himself when he notes how useful he’s been to the dwarves so far: he’s bragging. At the same time, the narrator paints a complicated portrait of dwarves. Some, such as Balin, are kind, and genuinely like Bilbo. Nevertheless, the dwarves as a group don’t value Bilbo’s life remotely as much as they value their gold and jewels. This foreshadows the conflicts of the final chapters of The Hobbit, and suggests that Bilbo, for all his flaws, is the real moral center of the book.
Bilbo climbs down into the mountain, where he notices a red light. As he gets closer to the source of the light, he realizes that he is looking at Smaug the dragon, lying on his treasure, asleep. The sight takes Bilbo’s breath away—he has no words that can describe it. He takes a cup from the pile of treasure, proud of himself for his bravery, and runs back to the door, where he shows Balin and the other dwarves the cup. Everyone is elated with this find, until they hear a huge noise, the sound of Smaug’s rage—the rage of a rich person who has just lost something he doesn’t really need.
Smaug’s evil is inseparable from his greed—he’s dangerous because, much like the dwarves themselves (or Gollum with his ring), he loves his treasure to the point where he’s unwilling to part with any of it. Tolkien lightens the mood here with an amusing comparison between Smaug and a grumpy old man, though that comparison also emphasizes that Smaug is the embodiment of a bad host: he shares nothing with anyone. It’s also important that Bilbo can’t describe Smaug’s treasure—and nor can Tolkien. Language is a powerful tool, but it has its limits, and here it fails to account for the wonder of the dwarves’ gold.
The dwarves are terrified to see Smaug emerge from the mountain, roaring with rage. The dwarves try to find shelter from Smaug; they are afraid to save Bofur and Bombur, who are stationed lower down on the mountain, in a more vulnerable position. Thorin insists that they rescue them by pulling them up with rope. Bilbo and the dwarves then run through the door into the mountain. They sleep there for the night, while Smaug searches the mountain for the thief who took his cup, and finds the ponies on which the dwarves rode. Though the ponies try to run away, Thorin despairs that they’ll be killed.
Thorin is hardly a perfect character, but he’s fiercely loyal to his dwarves, who have followed him across the world in search of treasure. The fact that Smaug eats the dwarves’ ponies makes him similar to the goblins, who did the same thing in the Misty Mountains. The good characters in The Hobbit are hugely different from each other, but the evil ones are largely the same: greedy, bloodthirsty, etc.
Hidden just inside the mountain, the dwarves try to decide what to do. They have no way of killing Smaug, which was the flaw in their plan all along, and Bilbo points out that he can hardly be expected to steal the huge amount of treasure under the mountain piece by piece. Bilbo impatiently offers to go down to Smaug and see if he has any weaknesses. The dwarves accept his offer.
Bilbo’s cleverness becomes increasingly important as it becomes clear that the dwarves aren’t strong enough to kill the dragon. There’s something cocky and arrogant about the way that Bilbo volunteers to talk to Smaug—he knows how valuable he is to the dwarves.
Bilbo again travels down to Smaug’s lair, to which Smaug has returned. Smaug looks asleep to Bilbo, but Bilbo doesn’t know about dragons’ keen sense of smell. Smaug smells Bilbo, and opens his eye slightly—he has only been pretending to sleep. He addresses Bilbo as “thief,” and tells him to enter and take what he wants of the treasure, since there is plenty of it to spare. Bilbo is too clever to fall for this ploy, and puts on his ring, telling Smaug that he has only come to see if Smaug is as impressive as the tales say.
Here, Bilbo’s smallness and inconspicuousness —the qualities that made the dwarves initially doubt him—become assets, allowing him to enter Smaug’s lair and talk to him. Smaug pretends to be a “good host” and offers Bilbo some of his gold, but Bilbo, who’s dealt with plenty of bad hosts by this point, isn’t fooled.
Smaug asks Bilbo for his name, and Bilbo replies that he is clue-finder, web-cutter, barrel-rider, and various other titles relating to his adventures. This, the narrator notes, is the proper way to talk to dragons, who can’t resist riddles. Smaug, says he doesn’t understand Bilbo but ate fourteen ponies that smelled of dwarf, and warns Bilbo not to associate with dwarves, since they’ll surely kill him after Bilbo does their dirty work for them. He adds that Bilbo, who has probably been promised one-fourteenth of the treasure, won’t receive any of it, since it’s impossible for it to be transported back to his home. Bilbo, falling under the dragon’s spell, is genuinely surprised to hear this, and wonders if the dwarves mean to cheat him. Nevertheless, he replies that he is confident in his friends, and turns the conversation to Smaug’s armor.
Bilbo’s listing of his names is a glorious feat of language, proving how far he’s come as a speaker and as a person. His experiences in the quest have become a part of his identity; he’s not just a hobbit who happens to have ridden a barrel—he’s a “barrel rider.” Yet these manipulations of language go both ways. Smaug uses words and cunning to manipulate Bilbo into doubting the dwarves’ honesty—Bilbo will be unable to get these thoughts out of his head for some time. Smaug is not just greedy; he sows doubt among others and as a result makes them greedy, too. Nevertheless, Bilbo is loyal enough to his friends that he doesn’t give in to his doubts, at least not right away.
Smaug, eager to show off his impregnability, rolls onto his side so that Bilbo can see his diamond armor. Bilbo notices, however, that there is a large hole in the waistcoat on Smaug’s left breast. With this information, Bilbo runs away from Smaug, who in rage bellows fire after him. The dwarves treat Bilbo’s burns, while Bilbo explains his conversation with Smaug. Bilbo, irritated with his wounds, throws a rock at a thrush, but Thorin tells him to stop, since thrushes are noble, talking birds who the dwarves have long used to communicate messages across great distances. Bilbo, meanwhile, regrets calling himself “barrel-rider,” since this will cause Smaug to think of Lake-town and to attack it. As the thrush listens, Bilbo tells the dwarves what Smaug said about being cheated out of his share; Thorin assures Bilbo that he was telling the truth, and tells him that he can choose his own fourteenth share.
Smaug’s weakness is his vanity (which might be described as a kind of greed relating to one’s own qualities)—if he hadn’t given in to Bilbo’s flattery, Bilbo would never have known that it was possible to kill him. Yet note, also, that it was Bilbo’s own vanity that made him incautious with his self-naming as “barrel-rider” and put the people of Lake-town in danger. Bilbo shares Smaug’s faults, just not to the same degree. When Thorin tells Bilbo not to hurt the thrush, he shows the alliance between dwarves and thrushes, and more generally, the importance of cooperating with nature. Smaug eats animals—in other words, attacks nature—and this is an essential part of how we know he’s evil. Bilbo and the dwarves, on the other hand, cooperate with animals; ultimately, this becomes a key part of how they defeat the dragon.
The dwarves turn to talking about the treasures they will own once Smaug is defeated. The most important treasure that the dwarves mention is the Arkenstone, an incredibly beautiful gem that shines like the moon. The group then hears a roar in the middle of the night, and Bilbo urges Thorin to shut the door in the side of the mountain. Just as Thorin shuts the door, they hear a loud crash. Smaug had emerged quietly from his lair and attempted to attack them, and now has caused an avalanche, trapping them in the passageway. They listen through the door and hear Smaug fly to the river to attack the men of Lake-town, who, thanks to Bilbo’s remarks about being a “barrel rider,” Smaug thinks played some part in the theft of his cup.
The dwarves display their love for their treasure, a love that borders on greed, particularly in the case of the Arkenstone. Bilbo’s remarks about being a “barrel-rider” do cause Smaug to attack the men. As Bilbo becomes more competent as an adventurer, his mistakes become proportionally greater, too. Heroism involves responsibility. Further, the fact that one’s actions can affect others in unforeseen ways becomes a kind of moral underpinning for the rules behind being good hosts and good guests, toward cooperation and trust rather than greed – in essence, if one’s own actions and successes impact and are supported by others, then one should be generous with those others as a way of acknowledging that interconnectedness.