Like many here have said, it was by Tolkien's own admission that he desired Middle Earth to be considered a 'lost' history...thereby giving England it's own mythology much like the Finnish
Kalevala, which was a major influence in his writing.
I can't remember where the quote is from (I think maybe Tolkien and the Invention of Myth by Jane Chance) but I recall that Tolkien once wrote a letter in which he stated that he felt England did not have any stories of its own, at least not of the quality he sought...stories that truly belonged to England and were not rooted in other cultures and lands (i.e. Beowulf, which is rooted in Scandinavian mythology and written by Anglo-Saxon settlers in England who were likely still in contact with with their Germanic kinsmen in Scandinavia and Northern Germany. So while it is considered an English classic, Beowulf is not rooted with the
land of England at it's heart). Tolkien desired a mythology with England at its heart, so he set about creating his own.
I wrote a paper on this in university, which is why I remember that quote, but not the specific source.
As for all the discussion on whether Middle Earth is really supposed to be our world in a literal sense...it seems to be a sort of yes and no answer. Yes, Tolkien wanted it to be a mythology for England with the land he loved at its heart (a pre-industrial England, where railroads and factories did not ruin the landscape. Tolkien despised the industrialization of England, and didn't even have a car for the majority of his life. Think about his depiction of the Scouring of the Shire).
But at the same time no, it is not literally our world in the way that we imagine literal today, with scientific proof etc. No, just like Beowulf is clearly set in modern day Norway and Denmark, that hardly means that dragons and fiercesome monsters lived in those areas when Beowulf was written.