Yeah, that’s my favorite GKC quote that’s not by GKC. It is close, however. Fantasy author Neil Gaiman paraphrased a Chesterton quote at the beginning of his novel Coraline. As he tells it, he put the paraphrase in the manuscript intending to go back and find the actual wording of the quote later, but forgot to do so before sending the manuscript off. Since then, his pithy (and very Chestertonian) rendition of the thought has become very popular. I suspect what he was actually thinking of was from an essay called “The Red Angel” in Tremendous Trifles:
Fairy tales, then, are not responsible for producing in children fear, or any of the shapes of fear; fairy tales do not give the child the idea of the evil or the ugly; that is in the child already, because it is in the world already. Fairy tales do not give the child his first idea of bogey. What fairy tales give the child is his first clear idea of the possible defeat of bogey. The baby has known the dragon intimately ever since he had an imagination. What the fairy tale provides for him is a St. George to kill the dragon.
I love Gaiman’s wording however, and think GKC would approve. (Gaiman’s version is actually “Fairy tales are more than true — not because they tell us dragons exist, but because they tell us dragons can be beaten.”)
Gaiman, by the way, is a huge GKC fan and considers The Man Who Was Thursday as required reading for any aspiring fantasy author. He and Terry Pratchett (both atheists) dedicated their wickedly funny novel Good Omens “to the memory of G. K. Chesterton, a man who knew what was going on.”