The dwarves are unaware, the narrator says, what happened to Smaug after he flew away from the mountain. The men in Esgaroth (i.e. Lake-town) see a light in the distance, which they think might be the dwarves returning to forging gold. But soon, they realize that Smaug is rapidly approaching their town. The Master tries to row away from the dragon in a boat, while the rest of the town blows warning trumpets and tries to defend itself. Smaug hopes that the townspeople will flee in boats, since it will be easy for him to trap them on the water and starve them out. He wreaks havoc on the town.
The Master reveals himself to be a coward, but the people of Esgaroth themselves are loyal enough to their own home that they stay and fight. Smaug meanwhile, reveals himself to be a sadistic villain, longing for the easy targets of boats in the water. It’s possible that Tolkien’s experiences as a soldier in World War I, the first war in which airplanes were used in large quantities, influenced his description of Smaug flying through the air, wreaking havoc on everything below him.
In the town lives a man named Bard. He is a descendant of Girion, who long ago was the Lord of Dale, before Smaug destroyed it. Bard commands a group of archers to shoot at Smaug. In the middle of Smaug’s destruction, the same thrush that was listening to Bilbo when he told the dwarves about Smaug’s weak point, flies to Esgaroth and tells Bard how to kill the dragon. Bard then takes his black arrow, which had been passed down to him from his father, and uses it to shoot Smaug in the weak point on his breast and kill him. Smaug dies, having already destroyed much of the city of Esgaroth.
Bard’s legitimacy as a warrior seems deeply rooted in his family—his ancestors were great lords. At the same time, his success in killing Smaug stems from the dwarves’ cooperation with the thrushes—without this alliance, Bard would never have known where to shoot. Even the greatest and most impressive heroes in The Hobbit depend on other people and animals, and feel a deep sense of loyalty to others. (Bard, for instance, is fiercely loyal to his people.) Villains, on the other hand, are often portrayed as being on their own; Smaug is the perfect example.
The townspeople, including the Master, who has hastily rowed back to the town, praise Bard for his bravery, but think that he’s died in the destruction. They say that they would have made him king had he survived. Bard appears suddenly, and the people chant that they want Bard for their king. The Master insists that Bard’s ancestors were kings in Dale, not Esgaroth; when this doesn’t work, he cleverly encourages the people to demand reparations from the dwarves for the damage Smaug has done to their home. This suggestion distracts the people from their proposal that Bard become king, and keeps the Master in power. Bard at first insists that it’s foolish to be thinking of the dwarves, since surely Smaug has killed them too, but eventually he gives in to the Master, reasoning that the dwarves’ treasure can be used to rebuild the city of Dale. He tells the Master that he’ll obey him for the time being, but may break away to found his own community later on.
The Master is a clever ruler (in the sense of keeping himself in power), even if he’s a coward. In Machiavellian fashion, he turns the people against an external enemy, thereby distracting the attention from himself. Bard, in contrast, proves that he’s an honest, sensible person when he says that the people shouldn’t be thinking about the dwarves at all—but in the end, even he isn’t immune to the force of the crowd. Though it is worth noting that the Master uses the idea of the treasure to keep himself in power, while Bard seeks to rebuild a city for the people of Esgaroth. Just as a good host trusts his guests, who in turn trust and respect him, a good ruler seeks to help his people who in turn grant him rule over them.
While Bard organizes the people of Esgaroth and marches them toward the Lonely Mountain, Beorn, the goblins, and the wood-elves also learn that Smaug has died. The Elvenking of Mirkwood marches to Esgaroth, where he offers aid to the sick and injured men in return for a reward of treasure later on. The Master hangs back, building a new town immediately north of Esgaroth with the resources the wood-elves lend the men, while the Elvenking and Bard then march their people further north to the dwarves’ home under the mountain.
The stage is set for the final part of The Hobbit: Smaug is dead, but various other enemies, including goblins, remain alive. The book is becoming more obviously political—in large part, the conflicts in the next few chapters won’t be physical, but verbal, hinging on complicated negotiations that involve various parties’ sense, based on both legitimate right and greed, of what should be theirs.