Secretly, in the world we know, the magical beings dwell. The vampires, the werewolves, the fae, the wizards. . . they hide from us both day and night, but their fugitive presence can be gleaned from clues for those singled out, and for those singled out even in that group, the fantastic world can be entered. Or they reach out and take selected mundanes into their charmed circle. (Even if the charms are not what you would wish for.)
The chief reason for this -- commonly called the masquerade -- is its use as a machine. There is no other plausible way to fit the fantasy in the actual contemporary world.
And it's been used for a long time. True, peasants who never went more than a day's journey -- 20 miles -- from home could put ogres and dragons in the forest, but even in those days, you had fugitive fae with the powers to transform, turn invisible, or sneak about at twilight.
People are willing to forgive a lot in a machine that enables the story to be told.
They do have a point. Contemporary fantasies where the magic is overt -- from Robert A. Heinlein's Magic, Inc. and Poul Anderson's Operation Chaos, where magic becomes technology and produces a world we easily recognize, to the Babylon quartet by Kit Sun Cheah and Haley's Cozy System Armageddon series by M.C.A. Hogarth, where the stories are post-apocalyptic, and all the stories in-between -- all have their settings heavily influenced by exactly how the magic appears, and consequently, it affects what plots are feasible.
Plus the masquerade allows some readers and writers the enjoyable sensation that it just might be real.
Still, all plot devices are better if they are elegantly fit into the world. The masquerade works better if it is justified, if there is some reason from those characters' point-of-view why they hide away. Plausible reason, to be sure -- implausible ones just draw attention to the plot hole.
The big questions are, when justifying the masquerade:
Why was it decided to do it?
Who has decided that it should be done?
What is being hidden, and how hard to hide is it?
What means do they use to enforce it?
There are the size issues.    The larger, in absolute terms, the group in #2 is, actually enforcing it, the harder it is to answer question #1, since the work requires a unity of purpose, and one firm enough to keep soldiering on after situations changed, and strong enough to keep them able to do so.    (Motives to hide can be all over the map, but must all lead to the same purpose.)    Especially since very little wavering can ruin all.
If most of the group in #2 are obeying the few decision makers, or the lone one, why are they obeying? What's in it for them? Especially since they have obey very well in order for it to work. Remember that if people are slack, there has to be a reason why they are not so slack that things slip. (Well, more than fits the world. Many worlds have a rather loose masquerade.)
But the smaller the group in #2 is, relative to the group in #3, the harder it is for them to enforce it. What is the source of their leverage? If they happen to be the most powerful, that complicates the issue as well. Why are the most powerful ones the ones motivated to do it?
Then, while a small group in #3 would, if not resolve, at least mitigate the problem, it would seriously limit the amount of magic and stuff available for story purposes. (Though that, in itself, has advantages for some stories.)
Not to mention that the motives of #1 may complicate #4. What is the point of harming people to keep them secret when the whole point of keeping them secret is to protect them?
True, it's very typical of a bureaucracy that it forgets its purpose and changes to protecting itself as a bureaucracy and its prerogatives and powers, but such conduct tends to mean the Masquerade would, logically, slip because it's no longer their concern.
You can, of course, write a story about the masquerade slipping, but even there these considerations arise.
And I will be expound on them in days to come.
Look forward to seeing more on the Masquerade!
Much like Mr. Howard, I'm looking forward to seeing what else you have to say about this.
I'll add that one specific 'Masquerade' of recent years in superhero stories that drives me nuts is when some publisher has Superman-level black superheroes running around in the 1940's-1960's hiding because the hordes of Evil White Racists would Kill Them All Because Racist. It's just so shallow in its understanding of both history and human behavior.