One writes such a story [The Lord of the Rings] not out of the leaves of trees still to be observed, nor by means of botany and soil-science; but it grows like a seed in the dark out of the leaf-mold of the mind: out of all that has been seen or thought or read, that has long ago been forgotten, descending into the deeps. No doubt there is much personal selection, as with a gardener: what one throws on one's personal compost-heap; and my mold is evidently made largely of linguistic matter.

A safe fairyland is untrue to all worlds.

I am rather tired, and no longer young enough to pillage the night to make up for the deficit of hours in the day..." JRR Tolkien, Letter # 174

What really happens is that the story-maker proves a successful 'sub-creator'. He makes a Secondary World which your mind can enter. Inside it, what he relates is 'true': it accords with the laws of that world. You therefore believe it, while you are, as it were, inside. The moment disbelief arises, the spell is broken; the magic, or rather art, has failed. You are then out in the Primary World again, looking at the little abortive Secondary World from outside.

They arose in my mind as 'given' things, and as they came, separately, so too the links grew. An absorbing, though continually interrupted labour (especially, even apart from the necessities of life, since the mind would wing to the other pole and spread itself on the linguistics): yet always I had the sense of recording what was already 'there', somewhere: not of 'inventing'.

And amid all the splendours of the World, its vast halls and spaces, and its wheeling fires, Ilúvatar chose a place for their habitation in the Deeps of Time and in the midst of the innumerable stars.

But to Sam the evening deepened to darkness as he stood at the Haven; and as he looked at the grey sea he saw only a shadow in the waters that was soon lost in the West. There he stood far into the night, hearing only the sigh and murmur of the waves on the shores of Middle-Earth, and the sound of them sank deep into his heart.