from CH Holman, Handbook of Literature: "Romance is now frequently used as a term to designate a kind of fiction that differs from the novel in being more freely the product of the author's imagination than the product of an effort to represent the actual world with verisimilitude."
Hawthorne's Definition of Romance (from "The Custom House", in The Scarlet Letter)
If the imaginative faculty refused to act at such an hour, it might well be deemed a hopeless case. Moonlight, in a familiar room, falling so white upon the carpet, and showcasing all its figures so distinctly, -- making every object so minute visible, yet so unlike a morning or noontide visibility, -- is a medium the most suitable for a romance-writer to get acquainted with his illusive guests. There is the little domestic scenery of the well-known apartment; the chairs with each its separate individuality; the centre-table, sustaining a work-basket, a volume or two, and an extinguished lamp; the sofa; the picture on the wall,--all these details, so completely seen, are so spiritualized by the unusual light, that they seem to lose their actual substance, and become things of the intellect. Nothing is too small or too trifling to undergo this change, and acquire dignity thereby. A child's shoe; the doll, seated in her little wicker carriage; the hobby-horse,-- whatever, in a word, has been used or played with, during the day, is now invested with a quality of strangeness and remoteness, though still almost as vividly present as by daylight. Thus, therefore, the floor of our familiar room has become a neutral territory, somewhere between the real world and fairy-land, where the Actual and Imaginary may meet, and each imbue itself with the nature of the other. Ghosts might enter here, without affrighting us. It would be too much in keeping with the scene to excite surprise, were we to look about us and discover a form beloved, but gone hence, now sitting quietly in a streak of this magic moonshine, with an aspect that would make us doubt whether it had returned from afar, or had never once stirred from our fireside.
"Unable to feel any confidence in the reality of the subjective, and unable, despite the long effort of his notebooks, to come to terms with the solid earth, Hawthorne evolved his conception of the 'romance.' Whereas the novelist was limited to "the probably and ordinary course of man's experience," the romancer tried to create a realm midway between private thought and the objective world. This doctrine, which is the burden of the prefaces to The House of Seven Gables, The Blithedale Romance, and The Marble Faun, betrayed an intellectual as well as a literary problem. Hawthorne was anxious not merely to draw the literary distinction between the novel and the romance, and to enter apologies for the latter, but also, and more fundamentally, to fix the status of the romance in an almost metaphysical sense. While he was granting or even insisting that 'reality' belonged to [Anthony] Trollope, he was trying, in effect, to say what kind of reality his own work had."
--Charles Feidelson, Symbolism and American Literature