From Old English 'dweorg' — originally master craftsmen of Norse myth, not merely small. Tolkien coined the plural 'dwarves.'
A member of a mythical race of small, stocky humanlike creatures, often skilled in mining and metalwork; a person of unusually small stature.
From Old English 'dweorg' (dwarf, a small supernatural being), from Proto-Germanic *dwergaz, from PIE *dhwerghos (something tiny, diminished). In Norse and Germanic mythology, dwarfs were not merely small but were master craftsmen who forged the gods' most powerful artifacts. The association with mining and underground dwelling reflects both mythological tradition and possibly folk memory of pre-Germanic peoples who worked metal in mountainous
In Norse mythology, dwarfs forged nearly every legendary artifact: Thor's hammer Mjölnir, Odin's spear Gungnir, Odin's ring Draupnir, Freyr's golden boar Gullinbursti, and Freya's necklace Brísingamen. The plural was traditionally 'dwarfs' until J.R.R. Tolkien deliberately used 'dwarves' (by analogy with 'elves') in The Hobbit (1937) — a spelling he later called 'a private piece of bad grammar.'