I think this is the passage you're thinking of. In Chapter 16 of Deathly Hallows, Hermione reads aloud the following bit from Bathilda Bagshot's "A History of Magic":
Upon the signature of the International Statute of Secrecy in 1689, wizards went into hiding for good. [...] Many small villages and hamlets attracted several magical families, who banded together for mutual support and protection. The villages of Tinworth in Cornwall, Upper Flagley in Yorkshire, and Ottery St. Catchpole on the south coast of England were notable homes to knots of Wizarding families who lived alongside tolerant and sometimes Confunded Muggles.
That last sentence is the interesting bit -- it's got a bit of conflict in it.
"sometimes Confunded Muggles" makes it pretty clear that at least some of these Muggles didn't know that they lived next to wizards. (Actually, judging from the rest of the books, I suspect that most of them didn't know -- perhaps the quote is saying that only sometimes is this enforced through magic.)
"tolerant ... Muggles", on the other hand, might well mean that some Muggles did know there were wizards next door, and did indeed live in harmony (or at least tolerance) with them. It's not all that clear-cut, though; it could just as well mean that they simply thought their neighbors were eccentric, and that's what they thought they were tolerating. There's not a lot of context in this excerpt to tell us either way.
Wizards revealing their existence to Muggles would, presumably, have violated the International Statute of Secrecy (though clearly there's some leeway -- the Dursleys knew about magic, for example; Petunia was never Obliviated to ensure secrecy). It's entirely possible that the occasional Muggle family were aware that they lived next door to Wizards. But I'm not aware of anything in canon that suggests it happening on a large enough scale to really call "Muggles and magic living in harmony".
