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This research paper explores how and why the existing tradition of supernatural stories about ghosts and other fantastical creatures, which located terror as an external factor in these unnatural and malignant beings, was transformed in the early to mid-Nineteenth Century into tales that are instead focused on fear in terms of the internal psychology of the narrator and the protagonist. It investigates two well-known examples of psychological horror, E.TA. Hoffmann's "The Sandman" (1816) and Edgar Allan Poe's "The Tell-Tale Heart" (1843). The research paper deploys a contextual historical approach examining the impact of Romanticism as a philosophy focusing on the individual's mental state and extreme psychological situations, as well as developing scientific ideas about psychology in the period. In my argument it is "madness" (which could affect anyone in society) that became the new fear that haunted and fascinated society, replacing the explicitly external supernatural. I also use Tzvetan Todorov's structuralist theory and model of "the fantastic" and suggest it is possible for a psychological tale to be fantastic in a different way than he envisages, insofar as madness is itself an experience where the victim is never sure if what they experience is real or unreal. [ABSTRACT FROM AUTHOR]