Specifically, the hobbit is a derivative of the Winchester measure of units enacted by Henry VII in the late 15th century. The term had various spellings, including hobbit, hobbet, hobbett, and hobed. It was conceived as a unit of volume equal to 40 gallons. Unfortunately, much like the spelling, the definition of a hobbit varied from region to region, not least because grain-sellers began using the hobbit interchangeably as a unit of volume and weight.
A gallon of water and a gallon of grain don't weigh remotely the same, and the confusion (or willful misunderstanding of math) led to a series of lawsuits in late 1800s over the breach of contract when a buyer's definition of a hobbit and a seller's did not match. As such, the hobbit fell out of general use by Tolkien's day, though whether it became so obscure as to ensure he'd never heard the term before conjuring up one Bilbo Baggins, one cannot say.
After all, he was only a professor of historical language.
That's not just some exceedingly interesting etymology; it's a linguistically unlikely labor of Geek Trivia.
Jay Garmon has a vast and terrifying knowledge of all things obscure, obtuse, and irrelevant. One day, he hopes to write science fiction, but for now he'll settle for something stranger -- amusing and abusing IT pros. Read his full profile. You can also follow him on his personal blog.