Dreams, Delusions, & Madness: Can you tell the difference?

Two types of "fantastic" stories: you/the narrator are totally insane and everybody knows it but you! Or: you/the narrator, are completely sane and have seen or experienced something uncanny, and everybody thinks you're nuts! These two tropes seemed to be really popular in the late 19th century, at least judging by the selections in the Library of America "American Fantastic Tales." The Repairer of Reputations (Campbell?) is a pretty good example of the first, as the narrator believes he's a king, has a crown that he keeps in a vault, etc., but from a few hints, such as comments other characters make to him, we know that he's in a complete fantasy world. This story isn't great, but it's quite unsettling in some ways (set in the future, which then was 1920, he imagines a public-works program in which suicide pavilions are set up in city parks. hmm) The most interest concept in the story is imagining a play in verse called The Yellow King that disturbs the mind of all who read it. (Apparently, this was a connecting link through a whole book of stories.) This clearly is the precursor to some recent Japanese horror films and American remakes. As to the other type of story, another selection in this anthology, The Dead Valley, is a decent example: young man goes for long hike with pet dog, finds himself in a horrible wasteland, wakes in bed suffering from a brain fever, nobody believes he went, so he retraces his steps, finds the skeleton of the dog. It really happened! This kind of story is much simpler, very often shows up in high-school lit magazines - and in The Twilight Zone and all its imitations. Seems there was endless fascination in the 1890s with the worlds of dreams and of madness: is it real? Or all in your imagination? And what's the difference?