Collecting: Truce declared in the war of words: Hay-on-Wye is as full of comical conflict as it is of secondhand books. John Windsor listened, laughed, and then gave peace a chance

Richard Booth appeared in his secondhand book warehouse in Hay-on-Wye looking slightly worn, wearing a three-day growth of stubble and a pullover with edges frayed and some staining. On the wall in his office was a framed colour photograph from palmier days showing him as a fresh-faced King of Hay in gold tinfoil crown, declaring home rule for the Town of Books he founded.

Time has not been kind to Mr Booth since the television cameras of the world recorded Independence Day, 1 April 1977. A rival showman, self-made millionaire Leon Morelli, bought his biggest bookshop, challenged him to buy a roof for his tumbledown castle, then deposed him in a referendum. 'The king has fled abroad,' Mr Morelli proclaimed to the townspeople, then handed the kingdom back to the Prince of Wales.

Today, few trippers on guided tours of the picture-postcard Welsh border town beneath the Black Mountains ask about the king in his castle. They want to visit the house where the lawyer Herbert Armstrong poisoned his wife in 1922 - the crime recorded in LWT's film Dandelion Dead.

Mr Booth and Mr Morelli - whose newly-built Pharos House, citadel of the commercial conglomerate he founded, looms in neo-classical hideousness just outside Hay - still trade insults in the Brecon and Radnor Express. Mr Booth, who thinks Mr Morelli collects development grant money the same way as he himself collects secondhand books - by the containerload - accuses him of corruption (which he denies). Mr Morelli harps on about Mr Booth's financial and electoral misfortunes. Arwyn Evans, chief reporter on the Express, said: 'Last week's letter from Mr Booth had 600 words, 400 of them libellous.'

When I went to write about the town that is host to next month's seventh annual Hay Festival (directed by Peter Florence, Hay's third mover and shaker, and sponsored by the Independent and Independent on Sunday) I half-expected to be greeted by a buffoon waving a bladder and to be buffeted by warring factions. Wrong.

I heard 'God bless him]' when Mr Booth's photograph was projected at Saturday night's charity slide show in the parish hall. As for warring, the town is permanently knee-deep in polemics and pamphlets: 'God Save Us From the Development Board for Rural Wales]' and 'Bugger Off, (F)arts Festival]'. But Hay-ites have witnessed so much comical combat that, nowadays, no one takes insults seriously. Instead, people beam like reincarnations from Brigadoon. My first thought was: what do they put in the water supply?

For a start, being English-speaking yet fervently Welsh has taught them to relish contradictions and to revel in the funny side. Mr Booth handed the town a king-sized contradiction: a rural trade that cultivates bookworms. His spoof independence movement, complete with passports, struck a vein of Welsh independence, and tickled, too. Ever since, the inhabitants have found it impossible to keep straight faces. In this magical town, sheep live in bottles and you can hear the sound of one hand clapping.

To penetrate Hay culture - I nearly said 'to be let in on the joke' - drive a mile or two to Mr Booth's Talgarth warehouse, which opens today. My visit was an initiation. Mr Booth intoned the secrets of rural economy until we found our aisle blocked by the answer to the riddle of the universe: a stack of remaindered copies of El Folklore de Oaxaca. Oaxaca, you recall, is in Mexico. Mr Booth held a specimen aloft: 'These,' he said, 'may be desperately wanted in Oaxaca.'

As he said, 'We've simply got to sell something that people can't find anywhere else.' He has imported 12,000 books from Venezuela. 'We have non-English-language archaeology, Latin American bibliography. Did you know there's a French period in Venezuelan history? French institutes of South American studies will have to come here.' Mr Booth maintains that secondhand books can save rural economies because they are really no different from potatoes. But I looked in vain for rustics. The curator of his El Folklore de Oaxaca is a language graduate.

Mary Ratcliffe, Mayor of Hay - 5ft 1 1/2 in of no-nonsense with a Birmingham accent, who keeps Mr Booth and Mr Morelli in check on the town's all-independent council - is a willing accomplice in Mr Booth's wizard wheezes. 'I don't know if he'll ever get rid of his Romanian books,' she confided. Then, almost straight-faced, 'I must tell him there's a Romanian Society in Birmingham. We could have Romanian dancing here.' She will, too. The town has 1,500 inhabitants (compared with 800 about 25 years ago), 26 secondhand bookshops and 11 miles of books. 'But for his publicity, we'd be like any other market town that's died; 70 per cent of shopkeepers are here because of him,' she said.

Mr Booth has founded five other book towns: Redu in the Ardennes, Montolieu in the Pyrenees, Becherel in Britanny, St Pierre de Clages in Switzerland and Bredevoort in the Netherlands.

Hay's own brand of developmental logic was lurching agreeably towards an uncertain horizon when it received a cultural shock in the form of Peter Florence, director of the Hay Festival. Still only 29 this year, He took a first in modern languages and classics at Cambridge and toured Europe and America with his one-man show based on Wilfred Owen's poetry and letters. The proceeds paid for the first Hay Festival, launched by him and his parents in 1988, shortly after they settled in the area.

Mr Florence's extraordinary idea was that authors who write books should be invited to perform in the Town of Books. Richard Booth scratched his head but could not recall an author ever having written a secondhand book. It was ascertained that authors produce a different product: 'new books'. Mr Booth quickly mastered the difference. 'Our business begins after they stop being shiny,' he recited. And there is nothing, absolutely nothing, shiny about Mr Booth.

He objected that the festival had jumped on the back of his Town of Books - the concept he had fostered for more than 30 years. 'All I want people to know,' he said, 'is that we sell secondhand Venezuelan books. New books can't survive in a rural economy. And 100 intellectuals talking about themselves are hardly God's gift to it.'

But a socio-economic experiment of his at the 1990 festival - revving his chainsaw outside a poetry reading - proved that a festival of literature can survive in a rural economy. Last year it was bigger than ever: 25,000 tickets were sold and the town banked more than pounds 2m.

Mr Florence's parents, like him, are actors. (His mother, Rhoda Lewis, is to appear in a TV version of Uncle Vanya.) In Hay, things seldom turn out as expected. It is the bookseller and the businessman who are the actors. The professional actors keep out of the limelight.

Mr Florence can make himself invisible, however. Especially in the vicinity of Kilvert's Hotel in Hay, where I was staying. It is the den of the unofficial 'fringe': local talent - musicians, poets, performers - who are unwanted by the festival. I watched from behind my bedroom curtains as Mr Florence drove to within 10 yards of Kilvert's to collect me for dinner. He was reluctant to come any closer. I lit out, sharpish, pausing only to trip over the cellarman's dog. 'I know it all seems daft,' Mr Florence said, sheepishly. Not in Hay it didn't.

The fringe made its debut last year, directed by David Eveleigh - Goffeee the clown - who lives opposite the parish hall. His Department of Enjoyment typifies the way Hay people institutionalise dreams. Kilvert's marquee had poetry, bands, clowning and a lecture on crop circles as art. Goffeee made a maze of fire on the festival site.

The Florences were called to account for the 'hippy stuff' after worried festival sponsors read fringe programmes claiming to 'complement' the festival. There was an explosive encounter between Goffeee and Mr Florence's father, Norman. He cancelled accommodation for three festival performers at Kilvert's, saying they would be 'staying with friends'.

One escaped, however. The comedian Arthur Smith, having performed at the festival, performed twice at Kilvert's to audiences swelled by sodden refugees from the festival site on the North Bank of the river, where tractors were pulling Rolls-Royces out of the mud.

Mr Florence is bewildered by local opposition. But his closely-knit family disdains being drawn into Hay histrionics. He said: 'All the personalities here are wonderful, but we don't want to compete.' Disappointment all round. 'They live in a glass bubble,' said a Florence antagonist.

The first week of this year's festival (20-30 May) features 'remarkable women': feminists Naomi Wolf and Betty Friedan, novelists Doris Lessing and Alison Lurie, travellers Jan Morris and Rebecca Stephens, and playwright-novelist Maya Angelou. The Comedy Store Players will be there. So will Rory Bremner, Ian Hislop and comic novelists Tom Sharpe and Howard Jacobson. Late-night cabaret: John Hegley, Donna McPhail and Fascinating Aida. There will be two new operas, four quartets, two Welsh tenors and Nigel Kennedy.

Arnold Wesker, Alan Clark and R S Thomas will be interviewed: Carlos Fuentes will lecture and you can sit at the feet of John Mortimer, Beryl Bainbridge, Vikram Seth, Sir Roy Strong; 15 top names from the Independent will also be trying to make themselves heard.

Kilvert's Fringe promises a 'festival of fools': 20 clowns in the streets and in A Midsummer Night's Dream at the castle (fortress Booth).

Mr Florence's hope is that his festival will throw up an author or two of the calibre of Dickens, adept both in print and on the platform. 'Contemporary history is too fast, too complex,' he said. 'I want to know how writers can help me to puzzle it out and get on.' His rationale for the festival, which should interest the Department of Enjoyment, has nothing to do with rural economics: 'The festival is not an economic or a tourist thing. It's a cultural thing: a non-profit public service. Any economic benefits are tangential. We just don't fit into the arguments.'

Unless Hayites decide to drag them in, that is. The Florences want a pounds 10m theatre on the North Bank. The town has its doubts. The natives became restive after a council meeting in March, at which Peter and Norman Florence, denied a hearing in camera, presented their proposals but did not stay for questions from the public.

On Monday, however, a reconciliation took place. Peter Florence, Richard Booth and Colin Thomson, proprietor of Kilvert's, attended a meeting about winter employment, called by Mr Booth and chaired by the mayor. They ended up, after I'd left, buying each other drinks, planning a town brochure and swapping names of likely sponsors.

'I hope it lasts,' said the mayor afterwards. Which makes me wonder about the corrupting effect of effete metropolitan cultures such as mine on rural communities with a tradition of verbal combat. I asked if winter unemployment was a problem. Now that you have imbibed the rudiments of Hay-think you can guess her answer. 'No, it isn't,' she said.

(Photographs omitted)