Yes, what I meant was that the White Council knew the Ring was lost, not destroyed. But everyone else except the very well-educated thought it was destroyed. The same way no one knew there was still an heir to the throne of Gondor, really...
One thing I love about the book is how dependent it is upon its own myths and legends. When Aragorn, Legolas, and Gimli meet Eomer and co. for the first time and tell them about the hobbits they're tracking, Eomer is at first disbelieving, and says (paraphrased), "Do we walk in legends, or upon the green earth in the sunlight?" He always thought hobbits were just a tale, much like the Ring or Isildur's Heir; so part of the magic of the story, for me, is that the characters are living out parts of the legends that they themselves grew up with.