This article is from the Tolkien FAQ, by William D.B. Loos firstname.lastname@example.org with numerous contributions by others.
Very thoroughly indeed. The scenario was that "of course" hobbits
couldn't have spoken English (the story took place far in the past --
see FAQ, Tolkien, 6); rather, they spoke their own language, called
Westron (but often referred to as the Common Speech). Tolkien "trans-
lated" this language into English, which included "rendering" all the
Common Speech place-names into the equivalent English place-names.
The object of the exercise was to produce the following effect: names
in the Common Speech (which were familiar to the hobbits) were
"rendered" into English (in which form they would be familiar to us,
the English-speaking readers); names in other languages (usually
Sindarin) were "left alone", and thus were equally unfamiliar to the
hobbits and to us. Since the story was told largely from the hobbits'
point of view, that we should share their linguistic experience is a
desirable result (especially for Tolkien, who was unusually sensitive
to such matters).
In portraying the linguistic landscape of Middle-earth he carried
this procedure much further. The main example was his "substitution"
of Anglo-Saxon for Rohirric. The "rationale" was that the hobbits'
dialect of Westron was distantly related to Rohirric; therefore, when
hobbits heard Rohirric they recognized many words but the language
nevertheless remained just beyond understanding (RK, 65 (V,3)). Thus,
Tolkien attempted to further "duplicate" hobbit linguistic perceptions
by "substituting" that language of our world (Anglo-Saxon) which has
(more-or-less) the same relation to English that Rohirric had to the
hobbit version of Westron.
There were many other nuances in the intricate and subtle linguis-
tic web he devised (always, he carefully explained, in the interests
of "reproducing" the linguistic map of Middle-earth in a way that
could be easily assimilated by modern English-speaking readers). Thus:
a) Archaic English roots were used in those Common Speech place-
names which were given long before the time of the story (e.g.
Tindrock, Derndingle; see Guide).
b) Some of the Stoors (who later settled in Buckland and the Marish)
dwelt in Dunland at one time (Tale of Years, entries for TA 1150
and 1630 (RK, App B)); the men of Bree also came from that region
originally (RK, 408 (App F, I, "Of Men", "Of Hobbits")). "Since
the survival of traces of the older language of the Stoors and the
Bree-men resembled the survival of Celtic elements in England"
(RK, 414 (App F, II)), the place-names in Bree were Celtic in
origin (Bree, Archet, Chetwood) (see also Guide). Similarly, the
names of the Buckland hobbits were Welsh (e.g. Madoc, Berilac).
c) Among hobbits some of the older Fallohide families liked to give
themselves high-sounding names from the legendary past (an example
of hobbit humor). Tolkien "represented" such names by names of
Frankish or Gothic origin (Isengrim, Rudigar, Fredegar, Peregrin).
These matters and much else is explained in detail in Appendix F.
Letters, 174-176 (#144), 380-381 (#297);
RtMe, 88-89 (4, "Stars, shadows, cellar-doors: patterns
of language and of history").