Capitalization

[Legolas]

When referring to the race (or sub-races, kindreds) directly as a whole, he capitalized them because they are proper nouns. When referring just a group of them, especially an unspecialized group, as a creature or creatures, he didn't capitalize them because they aren't proper nouns.

Tolkien explained it well when he commented on this capitalization style in Letter No. 21, a note to an employee at his publisher:

Men with a capital is, I think, used in text when 'human kind' are specifically intended; and man, men with a minuscule are occasionally and loosely used as 'adult male' and 'people'.

'Hobbits' is capitalized on many occasions, but throughout the story you usually don't see it capitalized because it is being used in reference to the four in the Fellowship - not the entire 'hobbit kind.' It's capitalized in the very first sentence of the prologue, and several times afterwards:

This book is largely concerned with Hobbits, and from its pages a reader may discover much of their character and a little of their history.

Here are some other examples to illustrate the difference between This and this.

Elves/elves:

He could dimly see the grey forms of two elves sitting motionless with their arms about their knees, speaking in whispers.

Not Elves; for the woodland folk were altogether noiseless in their movements.

Dwarves/dwarves:

As is told in The Hobbit, there came one day to Bilbo's door the great Wizard, Gandalf the Grey, and thirteen dwarves with him: none other, indeed, than Thorin Oakenshield, descendant of kings, and his twelve companions in exile.

‘Beyond the eyes of the Dwarves are such foretellings,’ said Gimli.

[davem]

There's an interesting note in the Foreword to the 50th Anniversary Edition:

Of course Tolkien wrote The Lord of the Rings over so long a period of time, some eighteen years, that inconsistencies in its text were almost inevitable. Christopher Tolkien even observed to us that some apparent inconsistencies of form in his father's work may even have been deliberate: for instance, although Tolkien carefully distinguished house 'dwelling' from House 'noble family or dynasty', in two instances he used house in the latter sense but in lower case, perhaps because a capital letter would have detracted from the importance of the adjective with which the word was paired ('royal house', 'golden house'). There can be no doubt, however, that Tolkien attempted to correct inconsistency, no less than outright error, whenever it came to his attention, and it was our opinion, with the advice and agreement of Christopher Tolkien, that an attempt should be made to do so in the anniversary edition, in so far as we could carefully and conservatively distinguish what to emend.

[AbercrombieOfRohan]

Aha! I see, thank you. I was reading the chapter at the Sign of the Prancing Pony when the hobbits are in Bree and there are two or three para graphs in a row that have funky capitalization. Makes much more sense now.