Folklorists divide creatures of the supernatural into two groups: those that the folk tell stories about encountering (consider how people today may describe evidence of a ghost or of seeing a UFO), and those of a distant time. Dragons, like giants, tended to be confined to a distant past. They were believed to exist, but people were not likely to believe that they still existed. So the stories of dragon slayings, and great heroes including St. George, were believed to be real, but of a former time.

I hope that's clear. Don't hesitate to ask questions.

The Chinese historian Chang Qu wrote specifically about finding "dragon bones" over 2000 years ago in Wucheng, Sichuan, China, which were almost certainly dinosaur fossils. (Dinosaurs from China / by Dong Zhiming ; English text by Angela C. Milner, London : British Museum (Natural History) ; Beijing : China Ocean Press, 1988.)

That text refers to Chang Qu's mention of "dragon bones" as being the earliest mention of dinosaur bones, but I am not clear on whether or not it is in reference specifically to Chinese history or to recorded history in general.

Further ancient references to giant creatures such as dragons and sea monsters could have similarly been influenced by the finding of fossils, and even things like whale bones found on shores.

Even though whales existed, most people in medieval times wouldn't have really considered that their skeletons might look totally different - How exactly would a society lacking in zoological understanding interpret something like a killer whale skeleton, which totally looks like a dragon, when you don't know what else it could be.

Similiarly, Adrienne Mayor (source) proposed that the cultural depictions of griffins were actually the result of people finding the skeletons of protoceratops', which kind of makes sense if you compare the two creatures

Conrad Gesner in his book Historiae animalium published 1581 wrote about dragons "de dracone" as if they existed. He had illustrations of three types of dragons. The general consensus for his book and most people was that if stories about dragons were so widespread, they must indeed exist.

There is a very interesting entry in the Anglo-Saxon Chronicle that features dragons. The ASC was a year by year historical account of major events in England. The deaths of bishops, the births of kings, military matters, etc., are recorded there. It was a historical document for the Anglo-Saxons, and features very few fantastical elements, which is an important factor. Of course, the chronicle does record portents, like comets and eclipses, but for the most part it is not interested in the supernatural.

And yet, in the entry for the year 793, when the Vikings first harried Lindisfarne and began a reign of terror, there are dragons. Here's the entry:

This year came dreadful fore -warnings over the land of the Northumbrians, terrifying the people most woefully: these were immense sheets of light rushing through the air, and whirlwinds, and fiery, dragons flying across the firmament. These tremendous tokens were soon followed by a great famine: and not long after, on the sixth day before the ides of January in the same year, the harrowing inroads of heathen men made lamentable havoc in the church of God in Holy-island, by rapine and slaughter. Siga died on the eighth day before the calends of March.

So, the question is, did the Anglo-Saxons, who were one of the most learned societies in Europe at the time, believe that dragons actually appeared as a forewarning of the impending Viking attack? That is a very complicated question. I can imagine some people believing it to be true, and perhaps the idea traveled orally in a game of whisper down the lane that escalated the telling of the tale according to people's heightened terror about the Viking attacks. It is likely too that this entry was written later, and the dragons were added to spice up one of the, if not the, most important entries in the Chronicle.

It is a big deal to take something, dragons, that one would most likely encounter in poetry, insulated far in the heroic past, as in Beowulf and the tale of Sigemund, and to put it into historical, remember-able time. And there aren't a lot of dragons in Old English literature (I can actually only think of Beowulf and this entry in the Chronicle at the moment). So invoking dragons, and placing them pretty much in the historical present, is a major signal. Whether people believed in dragons flying around Englalond in 793ad or not, we can't know. But the appearance of dragons clearly indicates something very serious, and not in a fun, fantasy story way, for the Anglo-Saxons.

So there is a sense in which the Anglo-Saxon people "believed" in dragons. Not in the sense that they necessarily thought they'd see one, but dragons clearly have a presence for them in the historical world, and not just in the distant past as this entry in the Chronicle demonstrates.

It seems understandable enough that our ancestors would have believed in dragons because of dinosaur bones... But how did the myths that dragons hoard gold and spit fire get started?

During my teens I was lucky enough to have a work placement in the most wonderful zoological museum. I was allowed behind the scenes, into their cavernous back rooms of jars of pickled things, and into a gorgeous library containing zoologically significant books from the modern day to hundreds of years old. One of the books, by far the best book I've ever read, was a bestiary a few hundred years old. It's been a long while so I didn't remember the title, but recent enquiries with the museum gave me 'Conrad Gesner (or Konrad or Gessner) and Ulisse Aldrovandi from the 16th Century' as being the book that I saw.

It was a huge thick volume, absolutely beautiful and detailed. Animals were split into groups, all the deer together, all the weasel types, all the seals, etc, each page with one or two pictures of the animals from the front or side and information on it. Among the real animals (which were either drawn fairly realistically in the case of the European ones that had probably been seen firsthand by the illustrator or, for more distant species, drawn in a strange way that suggested they were being drawn from descriptions or older inaccurate images like this elephant) there were pages detailing all the different species of mermaids (which were goblin-like creatures resembling dried rays standing upright on their hind fins) and other fanciful creatures, less known ones like catoblepas among the cow species, and a great deal of pages devoted to wyrms and dragons of all sorts, the details of their habitats and habits as fleshed out as any of the other foreign and exotic animals. Stories of dragons from far off lands left no more fanciful an entry in the book than stories of elephants. Like the mermaids, it seemed pretty clear that there were hints of real animals in there, in the proportions or teeth or pattern of scales. Can you imagine what the skin of a 20ft crocodile would seem like to someone who had only ever seen tiny snakes and lizards (reptile species are thin on the ground in chilly England), or the skin of one of the larger snake species, accompanied by completely true stories of them hiding in wells and swallowing children whole? For the most part the dragons and wyrms in the book were as real as elephants and rhinos, they just got embellished a little!

I know that this is a little off from the time period you asked about but Carl Linnaeus (famous Swedish botanist) was contracted to verify a stuffed dragon in Hamburg in the early 18th century.

As much as this may have upset the mayor, Linnaeus made his observations public and the mayor's dreams of selling the hydra for an enormous sum were ruined. Fearing his wrath, Linnaeus and Sohlberg had to leave Hamburg.

Source

Mythical creatures in general were often included in medieval travel accounts to the east. The medieval cosmographical conception of the world was heavily shaped by both ancient accounts such as Pliny's geography, as well as biblical tradition in which 'mythical creatures' such as giants were often mentioned. Thinking of examples of dragons in particular I know that the 14th century missionary Oderic de Pordenone specifically mentioned being attacked by dragons during his travels across India. The degree to which this would have been considered 'real' is debatable, yet if was certainly not beyond the realms of possibility for a medieval European mind which was often fascinated with the exotic and the unknown often believed to exist in the far east.