You know, I like your statements, X. While disagreeing with most, I cannot remain unimpressed by their honesty and depth.
The inner-truth you speak of is something one can refer to as faith, or ideology. I respect any person who is honest about his ideology.
My belief about the people of antiquity is the opposite. While you say they were more honest, I think it was the contrary. Many years ago, when people still knew very little about this world and the forces in it, there was much more space for imagination. So I think those people's imagination was far wider than ours.
People could not understand natural phenomena, so they made up explanations. The ancient Greeks are a great example, as they actually had a god "representing" every phenomenon. Similar were the Egyptians, the nations of Mesopotamia, and the native Americans. Not being able to understand the world around them, people needed alternative explanations for diseases, drought, natural disasters.
So they made up dragons, monsters and heroes with inhuman might. They needed legends to understand, and as you said yourself, most of the legends were passed orally. Since there was no physical evidence to support the legends, after some time no one can say whether they are truth or fiction.
While many legends have some factual fractions in them, most were so exaggerated by fictional additions, that the truth is very hard to find.