I was doing some research on the 1920's author Leonard Cline to support an answer to this question, and I came across this October 2006 comment on his works by Weird Tales Magazine (defunct) [the first paragraph is long but relevant, the second paragraph contains the central point of this question]:
It would be too simple to dismiss this as kitsch were it not for two things. The first is the seminal importance of the story to modern horror fiction. As Douglas A. Anderson points out in his informative introduction, Lovecraft read the book and passed it along to several of his associates, including Donald Wandrei, Clark Ashton Smith, Frank Belknap Long, and Henry S. Whitehead. All of these wrote stories dealing with ancestral memory that owe their existence in large part to Cline, but Cline’s treatment of the theme, besides being the first, is also the most powerful. Cline used the Gothic trappings as a cultural shorthand that allowed him to communicate ideas that were cutting-edge during the 1920s.
He is an excellent example of how mainstream writers prior to the 1920s could utilize themes and subject matter that would be thrust into a literary ghetto in a few years with the rise of critics such as Irving Babbitt and Edmund Wilson.
I thought I was familiar with the development of the SF/horror genre, but the tail of the above quote left me with a major question regarding this "literary ghetto" as it pertains to Science Fiction/Horror genres. I followed the leads on Irving Babbitt and Edmund Wilson and found that they were polar opposite: conservative vs. socialist, respectively, and of two different generations (1865-1933 and 1895-1972). Leonard Cline's works of relevance were 1925-1927.
Wilson is also well known for his heavy criticism of J.R.R. Tolkien's work The Lord of the Rings, which he referred to as "juvenile trash", saying "Dr. Tolkien has little skill at narrative and no instinct for literary form."
This has left me confused about the origin and history of this "literary ghetto" and its effect on Science Fiction. Lest this flow into philosophy or politics, I'd like to try to keep focused on the impact to the genre itself.
Was this "literary ghetto" a real thing, and if so, are there any concrete examples of a lasting effect on the Science Fiction/Horror genre?