I was also wondering if anyone believes that there are or used to be mystical beings living here on earth. Any information would be greatly appreciated.

Mulderout

I think dwarves came from simply the dwarf population in people. Elves probably stemmed from nordics belief of light elves and such, and probably originates from the General European Tribal culture's fear of certain sacred forests and monsters in forests and such. After all Elves really are only the best traits of humans.

Sincerely,
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You always like to think that elves, dwarves, orcs, and what not roamed the same earth that we do, but it can't really be debated becasue theres no proof one way or another. People never payed attention the the mythical creatures you speak of until Tokien wrote his books and give all the races their history and being. As far as mythical beings living on earth is concerned, i think that there are creatures that we've not yet discovered but not the kind that your thinking of.