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How it happened that Lake Town got built so close to the Smaug?

Lake Town was built near the remnants of the old bigger town that was destroyd by Smaug. But that soon became a legend and only greybeards believed that Smaug existed. Then, it was great place for river trade.
    "Not far from the mouth of the Forest River was the strange town he heard the elves speak of in the king's cellar. It was not built on the shore, though there were a few huts and buildings there, but right on the surface of the lake, protected from the swirl of the entering river by a promontory of rock which formed a calm bay. A great bridge made of wood ran out to where on huge piles made of forest trees was built a busy wooden town, not a town of elves but of Man, who stil dared to dwell here under the shadow of the distant dragon-mountain. They still throve on the trade that came up the great river from the South and was carted past the falls to their town; but in the great days of old, when Dale in the North was rich and prosperous, they had been fleets of boats on the waters, and some were filled with gold and some with warriors in armour, and there had been wars and deeds which were now only a legend. The rooting piles of a greater town could still be seen along the shoreswhen the waters sank in the drought.

    But man remembered litle of all that, though some still sang old songs of the dwarf-kings of the Mountain, Thror and Thrain of the race of Durin, and of the coming of the Dragon, and of the fall of the lords of Dale." ... "But this pleasent legend did not much affect their daily business."
    [The Hobbit, p 190 & 191]
  • The Hobbit, pages 190. & 191., paperbound edition, Ballantine Books, ISBN 0-345-33968-1
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