Why should the Gods let them be? On one hand, the Children are not entirely part of the divine plan for Creation. On the other hand, there's lots of things in Creation which were not created at the beginning, but arose later on as a natural consequence of the original design, and the Children of Grace are not hurting Creation through their existance.
On one hand, the Children are tricksy little blighters who will do all they can in order to pull the wool over your eyes, and they lack the shame to restrain themselves from trying it on with the gods. On the other hand, if you are skillful enough in your dealings with them they can be masterful craftsmen and produce very valuable items. You simply have to be careful: they will often try to pass off an inadequate job as a finished product - for example, you might ask for a strong sword to get a rusty chunk of iron with sharp edges. Once you have suitably taken the Child in question to task, pointing out the solemn promise you extracted from them (you *did* make sure they made a promise, didn't you?) and making sure they understand that a sword ought to be a reliable weapon in good condition, which will not turn to straw or any other undesired substance once the Child has made its getaway, they will give you a masterfully crafted blade which you can be proud of. A Child will never break its word, though it will often try to twist it.
In the end, there are a good many gods who are displeased with the Children, having been made fools of in the past. There are also a great many gods who have profited from the establishment of a certain understanding with the Children. Clearly, the Children will have no qualms about hiding behind their patron-gods should those they have tricked attempt to destroy them, and so this status quo has persisted for some time.
History of the Children. The first Children of Grace were conceived as soon as the first mortals were old enough to play their part in their creation, for in the earliest of times the mortals were playful things which had not established the twin traditions of monogamy and jealousy, nor had they become afraid of the servant-spirits of the gods. They lived in the deepest parts of the great forest which covered Britain, Ireland and the northern European mainland in those days, and it was soon after the first mortal kingdoms were established that the Children imitated them and established their kingdom. It was an unusual realm, in that was more a collection of enclaves dotted about Europe rather than a coherent realm collected in a single space with clearly defined borders. Travellers would on occasion meet Children - sometimes just one, sometimes a whole riotous cartful of them - travelling from one part of their kingdom to the other.
The Kingdom of Grace was a wondrous place to visit, thanks mainly to the skill of the Child craftsmen: whilst they were incapable of making any truly original works, what they made was nonetheless both strikingly beautiful and of the highest quality. It isn't really surprising that mortalkind should become greedy and desire some of these treasures for themselves. It isn't surprising either that they ran afoul of Grace trickery.
At the start of the ensuing war of mortal and Grace, the Children held the upper hand. They did not obey the honourable rules of war that the mortals held so dear, and nor were they above using their magics to aid their fight. The mortal armies got nowhere until they brought in powerful human magicians, who managed to save the mortal armies from utter defeat but could not provide the edge required for victory. With the gods refusing to intervene, and the war lasting for many mortal lifetimes and a fair chunk of a Child's lifetime, it's perfectly understandable that both sides decided to look elsewhere to find aid. Hiring dream-walkers to obtain aid from Dream was a sensible choice - hiring them to obtain aid from the Unreal was not. The gods stepped in before the damage was done, and imposed a peace deal specifically designed to displease both sides in the conflict.
The Children felt vindicated when the provisions regarding their right to enforce their laws were included in the peace deal. They were displeased by the obligation to render yearly tribute unto the gods, but were more upset by the clause compelling them to hide the entrances to their kingdom thoroughly - this went against the natural Childish instinct to show off. Yet they had no choice but to accept the treaty - the Children may be frivolous, but they are wise enough not to say "no" to the gods.
An uneasy peace between mortals and Others remained from there on, though the two races never truly trusted one another again. The mortal kingdoms of northern Europe established a chivalric company of warriors and wizards, the first knighty order, which persists to this day as a secret society: the Order of the Knights of the Yellow Field. (The Yellow Field was the site of a great massacre of Children during the war). The Yellow Field has been a thorn in the side of the Kingdom of Grace ever since. Meanwhile, the Children tended not to travel on the open road any more when they had to travel through mortal lands, preferring to pass by night on forgotten, overgrown paths, working mischiefs on the way.
Then came the War of the Gods, and the Iron Rule. The Children opposed the Gods of the Iron Laws, for whilst they feared the Old Gods and resented the tribute they demanded they nonetheless understood the necessity of what the Old Gods did. For this their kingdom was unjustly bound within dream. Throughout the Iron Rule a few lone Children managed to escape back into the world to tell tales of the Kingdom of Grace in a state of siege, struggling to keep out the wild things of dream and the occasional Unreal battle-company.
These lone escapees often found themselves pursued by the ever-vigilant Yellow Field, and by the Iron Laws themselves. They therefore frequently sought sanctuary from the New Gods, and several New Gods have Child squires, butlers, or henchmen. The Children seem to be less resentful of the New Gods than the Old - with the proceedings of Heaven halted during the time of the Iron Laws there has been nobody to pay tribute to, and the often flighty, irreverant attitude of the New Gods is compatible with that of the Children.
According to the most recent stories, the current King of Grace is Aeber XXXIII, direct descendant of Aeber XIV who ruled at the time of the war of Grace and men.