Oh, I was just browsing through the Filing Cabinet when I saw this thread - Click
Someone else, it seems, had issues with the idea of the word "Muggle" in earlier times. There aren't a lot of posts available, but -shrug- I thought maybe it might help a little.
EDIT: I've been browsing the Old English dictionary too, and one word caught my eye. Yfeldysig - which translates to a word, stultomalus, that's not really English or used in anything but Old English dictionaries according to Google, which is why it caught my eye - translates, literally, to "evil-stupid." Which could be a term of contempt for Muggles. I like playing around with words and place names, making new ones, so I decided to make a term for Muggles out of it that sounded more...well, something we could pronounce. What I came up with was "Iveldisifolk." (Not, perhaps, ideal - but less of a mouthful than all those y's). If you have any interest in coming up with a new word, I'd suggest going through an Old English dictionary (or something) - there are several good ones online - and pick out words with meanings that fit and stick them together. Often you can see where some words derive from them (such as yfel > evil) and looking the Modern English word up on Dictionary.com can give you some tips as to how the spelling might have evolved over the years. Anyway. Thought I'd mention it.