A Thursday in early spring. Market Day. It is raining, but only softly. There are queues at the cheese and fish stalls, but the tourist trade has not yet geared up, and most of the buyers are local, save for a coachload of elderly ladies from Southampton.

This might be any of the hundreds of quaintly decaying market towns in the north and west of Britain – too far from London to be commuterised, although not beneath the notice of one of the supermarkets who will come along and suck the blood out of the place.

But this is Hay-on-Wye, and Hay is different. “Do you want to go into a bookshop?” I heard one of the Southampton ladies say to her companion. “I went into one a few weeks ago,” came the reply. “I tried to sell some old books. Reader’s Digest, you know.” She paused, then added sadly: “They weren’t interested.”

Most small towns have a second-hand bookseller, or did have. Hay has 30 (none of them likely to be interested in her Reader’s Digest volumes). Instead of fading into genteel oblivion like the rest, this tiny Welsh border town made itself world-famous. Thanks to the bookshops, Hay still has two butchers, a baker and a growing number of chichi candlestick-makers.

And this is its week of weeks. Today, the Hay Festival moves into full swing, and from now until Sunday week, as many as 35,000 people a day will funnel into a festival site just outside a town of 2,000. “The place has gone crazy,” they would say anywhere else. But then Hay is always a little crazy. It also seethes, rather more than a successful town ought to do.

The modern history of Hay is centred on one man, Richard Booth, who came down from Oxford and opened a bookshop in 1961, the obvious prelude to a life of shabby obscurity. But in Hay, books begat books. Booth quickly sensed the value of accretion, and began buying up massive libraries: “I used the skills which I needed and they were basically moving skills,” he said. “No one else wanted to shift 200 tons of old books down the stairs.”

He was also a publicity genius. Thus, on April 1 1977, he declared Hay (technically in Wales, postally and spiritually in England) an independent kingdom with himself as monarch. This bemused the local constabulary and amused the world.

Those were riotous times, the heyday of Hay. “Suddenly all these mad people came in, led by Richard, and took the place over,” recalled one of the incomers, David Eveleigh (better known locally as Goffee the Clown). “All the other booksellers. And lots of artists, just buying up the cottages on the hillsides. There were all these wonderful smells of people making jams from the hedgerows. And other smells too.”

The spirit of that era has not entirely vanished. Hay’s history, however, can also be seen through the prism of three civil wars. The first, Booth v the town’s old establishment, was a rout. The second, Booth v his business rival Leon Morelli, was long-lasting and either hilarious or horrendous, depending on your standpoint. The third, Booth and a portion of Hay v the festival, still simmers. He calls the festival “a nightmare”.

“It has absolutely devastated Hay,” he says. “A new book is … for the ego. A second-hand book is for the intellect. Since the festival began, we’ve had a severe decline in the buyer of the second-hand book, who’s different from the buyer of the new book.”

Now 70, still surveying the scene from his eyrie in Hay Castle, surrounded by a bizarre range of objets trouvés, King Richard has lost none of his talent for mischief, but some of his unpredictability (I was warned precisely what he would say before he said it) and touch. After all, second-hand books have to start somewhere. And they start as new. One suspects his hatred of the festival comes because it’s not his show, and let him who is without sin among us cast the first stone on that score.

But he represents a local faction, some of whom simultaneously argue that, in its 22nd year, the festival has become too corporate and that – since it moved out of town four years ago – Hay no longer makes as much money out of it.

I was pointed towards two adverts from sponsors in this year’s programme. One, from Barclays Wealth, twists a quote for its own ends from the great capitalist refusenik Henry Thoreau – “Wealth is the ability to fully experience life” – which is indeed an act of breathtaking chutzpah, in this of all years. The other, from Sony, raises more relevant issues, of which more anon.

The festival rests on the fundamental Boothian principle that more is more. As with the 30 bookshops, there are far too many events for anyone to cope with: 358, all jostling with each other. It’s become like the Olympics, and that’s the secret. It creates its own sense of occasion. The organisation is never, um, obvious – but somehow it comes together, resting above all on director Peter Florence’s ability to persuade the world’s biggest names to get here (2008: Jimmy Carter; 2009: Desmond Tutu. And 357 others, many almost as famous). “He’s one of the great cultural entrepreneurs of our time,” says one publisher, Stuart Proffitt of Penguin (owned by Pearson, which owns the FT).

Florence hurls away the accusation of corporatism: “We’re not trying to make money. We’re a charity. But without sponsorship we’d have a bunch of people in a field looking at cows.”

Juliet Noble of Shepherds ice cream parlour thinks the festival’s fame has helped the town the other 51 weeks: Hay has now become a centre for the new holiday-at-homers. David Eveleigh points to two new arts centres, the Globe and another being built at the back of the Limited bookshop. “Hay’s having a renaissance,” he says.

This does not necessarily cheer up the booksellers. “The footfall in Hay has dropped dramatically over the last five years, especially in the winter,” says one, Derek Addyman. The sellers now chase the buyers on to the internet, without – unlike so many bookshops elsewhere – quite giving up their shop windows. “Hay survives because it has so many bookshops, that’s the beauty of it,” he adds. But it was Derek’s wife, Anne Brichto, who noted with alarm the Sony ad: “160 books under one cover,” it reads. “The new eBook Reader from Sony.” She sighed: “It’s a little bit upsetting. People in the know think that’s death to the book.”

As ever in Hay, that’s just the cue for an argument. “It’ll be the best thing to happen to the second-hand book trade,” says Peter Florence. “There won’t be 3 million copies of the latest bestseller on the shelves of Tesco, so second-hand books are going to get more valuable. They will become more of a connoisseur’s thing. The essential pleasure of reading will never change.”

Analyse and discuss. As they will do in Hay. All week and indeed all year. Until they move on to the rumours about Waitrose arriving.

Matthew Engel will discuss his new book, ‘Eleven Minutes Late’, with Peter Florence at 2.30pm this Sunday, May 24, at the Hay Festival

matthew.engel@ft.com

Matthew Engel’s dispatch appears fortnightly