This is not a history lesson - really.
We have had forms of fantasy literature for thousands of years, from the Mahabharatha (classic epic fantasy) to Greek mythology (can you get any more fantastic than a woman with snakes for hair?).
The genre really caught on in the late 1800's with a book by William Morris, called "The Well at the World's end" , a powerful work written in three parts.
Read for free here: http://www.gutenberg.org/etext/169
The deliberatly archaic language (he was inspired by medieval romances) adds to the fable experience, and brings a richness to the now-trite storyline.
Another great work around the early 1900's was a book by Lord Dunsany - "The King of Elfland's Daugther". I have not read the other books he wrote, but they are reputed to be just as good. Lord Dunsany really set the bar for high fantasy.
The genre really took off in popularity amongts the masses with the still famous "The Hobbit" by J.R.R. Tolkein.
Closely following this comes C.S. Lewis' "The Lion, The Witch and The Wardrobe" - a wonderful fantasy story and series, for the younger reader. This was the first true fantasy story I read, probably when I was around 10 years old and unable to find books involving the Famous Five or the Hardy boys :)
A little wiki tidbit: Both these authors were part of a group called The Inklings which studied William Morris' works.
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