Firs of all, the supernatural beings of nature (which went by various terms in various cultures - fairies, elves, trolls, huldrefolk, etc.) were dangerous, powerful entities that people of pre-industrial Europe believed to be real. Stories about these entities were repackaged by various authors who wrote "fairytales" largely for children, which diminished the importance of the original entities and started their literary evolution into various directions. This included their adaptations by Disney, Tolkien, etc. For the folk, the legends and folktales told about these supernatural beings did not evolve, or if they did, change was glacial. Change occurred with the advance of literacy and the use of the material by literary figures. One would not talk about these beliefs in the context of medieval childhood, because they were the common property of the medieval world - and part of the active belief system for adults and children.

On the issue of good versus evil and the folk context, the following excerpt from a book I am assembling for electronic distribution, An Introduction to Folklore, may be of use:

One of the pressing problems for the European peasant was how to account for the world’s various supernatural beings, entities not mentioned in Christian documents. The folk constantly faced the question of how these creatures fit into the system of the saved and the damned. Educated priests told people, after all, that the strict division between good and evil had universal application. How, then, did the elves and fairies rank in the Divine plan? The peasant was never sure how to answer this question. The educated elite, on the other hand, had no trouble with this problem: elves and fairies were evil. This is the position that the Beowulf-poet took in the eighth century when he suggested that elves, like the monster Grendel, descended from Cain.

From him the evil brood were all born, Giants and elves and evil spirits, And also the giants who fought against God For a long time; He paid them retribution for that.

This sort of interpretation, however, never caught on with the peasantry although it was acceptable to the higher clergy. Many people were condemned as witches for innocently making sacrifices to elves and similar supernatural beings.

Pre-industrial European legends show that peasants until recently thought of elves and fairies as neutral beings, without a definite place in God’s spiritually-dichotomized world. Some legends explain that the elves and fairies were angels who refused to take either side in the great conflict between God and Satan. Other legends suggest these supernatural beings were the souls of pre-Christian people, or that they were the deceased who were not good enough for heaven, but not bad enough for hell.

When the peasants did take a stand concerning the position of elves and fairies in relation to God, they generally said that the entities have at least a chance of salvation. Christiansen classifies the stories along this line as Migratory Legend 5050, “The Fairies’ Prospect of Salvation.” In this legend, someone hears the fairies singing in their mound, and he tells them that they should not be so happy because they have no more chance of salvation than his cane does of sprouting leaves. At this, the music stops, and the fairies begin to weep. When the man awakens the next morning, he finds that his cane has sprouted leaves, and so he hurries back to the mound to tell the fairies that God has sent a sign that they do indeed have a chance of salvation. Upon hearing this, the fairies resume their music.

This popular legend shows clearly that if pressed to make a definite judgment, peasants said that the fairies are like men: they are neither good nor evil as a whole, and they have a chance of salvation. The peasants retained a belief in the neutrality of the fairies and at the same time worked them into the Christian cosmology. Here, the synthesis of the Christian concept of good and evil has been tenuously reached. Variants of the legend even incorporate the Biblical motif of the sprouting cane, a sign, which told the Jews that the house of Levi was to be the house of priests. The ultimate failure of the peasants’ attempt to find a synthesis between the concepts of good and evil and their belief in fairies is indicated by two factors. First, the educated elite of Europe and the higher clergy never accepted this judgment, and second, other legends of the peasantry continued to place the fairies in an ambiguous position in relation to good and evil. In fact, still other legends tell of the fairies’ fear of crosses and holy words.

The example of the fairy shows how difficult it was for European peasants to place one of their neutral, pre-Christian beliefs into the Christian universe. The treatment of the devil in European folklore illustrates the obstacle peasants faced when assimilating even the most absolute symbol of evil into their belief system. The devil usually appears in the place of the stupid ogre or in the role of a trickster. Although these beings are often the opponents of humanity, and they are certainly dangerous, they are also rather amusing and can be beaten. Peasants clearly understood that the devil wishes to gain human souls, but they could not help thinking of the devil as just one of many dangerous supernatural beings in the world. The pre-industrial folklore of Europe shows the devil as an easily-defeated, sometimes rather pathetic creature who was not as absolutely evil as Christian dogma taught.