In the summer of 1903, in the garden of a rural vicarage in Somerset, a chance meeting took place that would radically alter the course of 20th-century British culture and music. Cecil Sharp, a former bank clerk turned classical composer, was conversing with some friends when he heard a gardener singing to himself as he worked. Sharp noted down the tune and asked the gardener for the words. That evening, Sharp performed his own, more musically ornate, version of "The Seeds of Love" with a female vocalist at a choir supper. A member of the delighted audience noted that it was "the first time that the song had been put into an evening dress".

This story, one of many fascinating tales told by Rob Young in his epic study of the various transformations of British folk music in the 20th century, is illuminating on many levels. Cecil Sharp, who subsequently travelled throughout Britain collecting old songs, is now regarded as the father of the English folk-song revival. John England, the gardener who set Sharp off on his journey of discovery,  and appropriation  has remained relatively unknown and unheralded, at least until now. Rob Young dubs him "the man who inadvertently triggered the 20th century folk-song revival".

Sharp met hundreds of what he called "the common people", who sang songs to him that had been passed down to them through the generations, songs that retained their mystery and power even though the events that inspired them  anything from a good harvest to the murder of an infant  had long since passed into myth. The songs were, in fact, the transmitters of those myths, evoking an older, predominantly agrarian England that increasingly existed only in memory.

What happens to that mystery and power, though, when a folk song is "put into an evening dress"? That is one of many complex questions that resounds through Electric Eden, a book that, for the most part, is a surefooted guide to the various tangled paths the English folk song has since been taken down by classicists, collectors, revivalists, iconoclasts, pagans, psychedelic visionaries, punks and purists.

Young begins his journey by looking at how the folk song provided "the vital nutrition" for the classical compositions of Gustav Holst, Frederick Delius and Ralph Vaughan Williams. Vaughan Williams's Norfolk Rhasody taps into melodies he wrote down while listening to a trawlerman from King's Lynn. Delius's Brigg Fair contains an English folk song he learned from his friend and fellow folk-song enthusiast, Percy Grainger. These classical compositions also tapped into a collective yearning for a fabled lost time.

Young touches all too briefly on the Irish folklore and songs that inspired some of Yeats's great poems, as well as the so-called Celtic Twilight movement in British classical music. He describes the first Glastonbury festival, which was held in 1914, an awkward merging of folk song, classical music and theatre. The spiritual forefather of Michael Eavis, founder of the contemporary Glastonbury, was Rutland Boughton, an eccentric who later committed what Young calls "professional suicide" by embracing communism and living in seclusion in the Forest of Dean.

In equating folk music with leftwing politics, Boughton anticipated the traditional folk song revival of the 1950s and early 1960s, a more working-class, leftwing, rigorously purist affair whose leading lights were Ewan MacColl and Peggy Seeger. That movement, though essentially backward-looking, would help beget the protest folk era of the mid-1960s and, by extension, the seismic moment in pop culture when Bob Dylan strapped on an electric guitar at the Newport folk festival in 1965. Throughout Electric Eden, Young's sympathies lie with the eccentrics and the iconoclasts rather than the purists, which is why Donovan and the even more hippy-dippy Vashti Bunyan are accorded as much importance as the Copper Family or the Watersons.

Rutland Boughton is just one of the oddball visionaries who make fleeting but dramatic appearances in Electric Eden. Another is the aptly named Peter Warlock, a wilfully dissolute composer who, in the 1920s, was given to riding naked though the Kent countryside, howling sea shanties outside his local church to drown out the singing of hymns and "indulging in threesomes with local girls". Warlock was born 30 years too early and would have felt utterly at home in the company of some of the wilder personalities who emerged during the extravagant flowering of electrified folk-rock in the late 60s and early 70s. They include the insecure but extrovert singer Sandy Denny, who fronted an early version of arguably the most important British folk-rock group ever, Fairport Convention, and the volatile jazz-folk bandleader Graham Bond who, as Young puts it, created "steamy, rhythmic workouts heavily infused with ritual magic chants and mantric voodoo".

Young's writing catches fire when he delves deeply and illuminatingly into the extraordinarily inventive hybrid music made at that time by the likes of Pentangle, Fairport Convention, Traffic, Nick Drake and John Martyn. He will make you think again about the still startling, if wilfully esoteric, songs of the Incredible String Band who, in their embrace of traditional folk, Indian and Balinese music, eastern and English mysticism and visionary nature poetry  all refracted though the prism of LSD  still sound like no one before or since. His research leads him ever outwards to the margins of electrified folk, the likes of Dr Strangely Strange, Heron, Forest, Mr Fox and the pioneering electronic folk of the Third Ear Band, who provided the suitably mystical-sounding ambient music for Roman Polanski's film of Macbeth. There is an intriguing chapter, too, on what Young calls the "enduring presence of the supernatural in the British folk tradition".

As the utopian visions of the hippy era receded, electric folk music reflected the loss of idealism in various ways. Richard and Linda Thompson embraced Sufism and made Pour Down Like Silver, a set of pared-to-the-bones songs as austere as their newfound lifestyle. The Incredible String Band fled from psychedelia into Scientology, never to recover the childlike joy of their early albums such as The 5000 Spirits or The Layers of the Onion. Nick Drake, desolated by his lack of commercial success and acutely depressed, took a fatal overdose of antidepressants in 1974. Four years later Sandy Denny, aged 31, died of a brain haemorrhage after a drunken fall down a staircase. The short-lived but vibrantly creative folk-rock era was over by then, but its legacy is still being acknowledged, not least in the retro-stylings of contemporary singers such as Laura Marling, Rachel Unthank and Alasdair Roberts.

Electric Eden is a big and wide-ranging book which, it has to be said, goes off on some strangely tangled paths of its own, particularly as its narrative draws closer to the present. I can just about accept that Kate Bush at her dippiest might be channelling the old weird Albion of early pagan folk songs, but the electronic soundscapes of Coil or Psychic TV are as far from folk music as it is possible to go. And where are those post-punk London-Irish iconoclasts, the Pogues? It seems perverse not even to mention Shane MacGowan, arguably the greatest writer of modern  that is, urban  folk songs in the last 30 years. That omission apart, this is a book of serious and scholarly social archaeology, and one that anyone with an interest in the history of British popular music, folk or otherwise, will find both constantly illuminating and consistently surprising.

In 1968, a beautiful young minstrel called Vashti Bunyan forsook the city and set off on an 18-month journey along the leafy lanes of Albion, in a rickety cart pulled by her horse Bess, heading for a remote Scottish island where the Pied Piper himself had promised to set up a happy haven of artists, musicians and poets. No, this isn't a fable, it's the true story of one of Britain's less famous folk singers, chosen by Rob Young for the opening chapter of Electric Eden, his survey of British "visionary" music and, more broadly, Britain's love affair with the notion of a pastoral paradise. When Vashti reached the Pied Piper's island, Donovan had fled for LA, but Bunyan's bittersweet tale  replete with the noble hopelessness of her determination to live as if the 20th century never happened  is emblematic of a whole generation of youth who seemed keen to drop out of industrialised society and "get back to the garden".

The core of Young's book is the late 1960s and early 70s, when pop's aristocracy dressed in archaic raiment and a cornucopia of folk-rock groups had names such as Tintern Abbey, Oberon, Dulcimer, Parchment, Mr Fox, Fotheringay, Fuchsia and the Druids. But Electric Eden does an admirable job of tracing folk's origins back to the 19th century, when upper-class academics first sought to capture the exotic ballads of rural Britain in annotated form. In a 664-page exploration with plentiful side trips, Young casts his net over just about everyone in this country who ever revived or preserved the past: William Morris, morris dancers, Vaughan Williams, David Munrow's Early Music project, the makers of the movie The Wicker Man, Cecil Sharp's English Folk Dance and Song Society, and so on.

It's a hugely ambitious undertaking that could be tackled from any number of angles. Young tries out quite a few, including quasi-fiction ("The battered Austin, its 50 years clearly legible in rust and mud flecks . . ."), meditations on the theme of the four elements, and straight scholarly record. What keeps it consistently readable is the happy marriage between Young's incisive observation and his talent for a vivid phrase. He praises the "arachnoid fingerwork" of Nick Drake's guitar technique, speaks of "a tidal spray of cymbals", drumming that "patters like butterflies trapped in a balsa wood box". Contemplating the bucolic cover image of an album by Heron, he sums it up perfectly: "John Constable has become court photographer to the counterculture."

Electric Eden is by no means the first book to trace the modern reinvention of folk music. A farrago of essays called The Electric Muse, originally published in 1975 to accompany a triple-LP set, was the standard text in its day, but several comprehensive studies have been published since the millennium. Britta Sweers's 2005 overview, Electric Folk: The Changing Face of Traditional Music, features valuable interviews and is pitched at a reader with no prior knowledge (dutifully explaining who Bob Dylan is), but it shows its origins as a young German's university dissertation. Michael Brocken's The British Folk Revival 19442002, which focuses more on the mainstream and politics than Young's tome, would suit readers who wish to study the "movement" rather than have their tastes expanded.

In his coverage of leftwing balladeers such as Ewan MacColl and Peggy Seeger, Young does acknowledge British folk as a voice of anti-authoritarian protest but, as the 1960s advance, he dismisses them as irrelevances "holding their breath until the revolution came". In Young's account, the true revolution occurred inside drug-expanded heads, when disaffected youngsters went in search of their inner elf (or hobbit). An oversimplification of 60s/70s counterculture, but a crucial aspect of it, and Young explores it in juicy detail. The story gets especially rich when the sylvan nostalgia of British folkies blends into the worldwide hippy dream. The founders of Glastonbury festival wished to "stimulate the earth's nervous system with joy, appreciation and happiness so that our Mother planet would respond by breeding a happier, more balanced race of men". Or, as one Stonehenge camper put it: "We want to plant a garden of Eden where there will be guitars instead of guns and the sun will be our nuclear bomb." Young doesn't sneer, but allows the quixotic dignity of these doomed idealists to resonate in all its sadness.

In any case, Arcadian idealism, like John Barleycorn, dies only to be reborn, as Electric Eden, with its wide historical scope, attests. The late-60s blossoming of Glastonbury was a revival of a Utopian project by Rutland Boughton, "communist, vegetarian and suffragette sympathiser", whose 1916 Glastonbury festival, supported by George Bernard Shaw, staged an Arthurian opera on a shoestring budget. ("The battlements of Camelot castle were delineated by four stout yeomen.") Young has a special fondness for madcap eccentrics, and Albion has always been well stocked with those. We meet the composer Peter Warlock during the second world war, riding his motorcycle naked and drunk through a sleepy Kent village, "indulging in threesomes with local girls", and "singing raucous sea shanties . . . in an attempt to drown out the hymns being sung in the neighbouring chapel". Had time machines existed, Warlock might have hung around with magick enthusiast Graham Bond, whose quirks included performing exorcisms on Long John Baldry's cat.

Young's background is editing the Wire, a magazine devoted to marginal music, so it's not surprising that he has scant regard for the more commercially successful folk-rock acts, such as Jethro Tull and the later incarnations of Steeleye Span. Cult figure Bill Fay, whose achingly compassionate social commentaries achieved sales so meagre that he was reduced to packing fish in Selfridges, is allotted several pages, while Ralph McTell's "Streets of London"  one of the most popular English folk records ever  is not even mentioned. This favouring of the obscure over the bestselling lends somewhat dubious support to the argument that folk had a brief heyday which was brought to an end by glam, punk and/or Thatcherism. If many of the acts that "flourished" during folk's glory years sold zilch, while other acts enjoyed brisk business after the genre was supposedly in terminal decline, does this mean that Young's generalisations are based purely on aesthetics? Are the stars of later decades  Billy Bragg, Clannad, the Pogues, Enya et al  evidence of folk's perennial ability to adapt to new musical fashions, or did Young disqualify them as redundant postscripts to a closed canon? The absence of chart placings and cash registers from this narrative is artistically commendable but muddies the historical picture.

In the concluding chapters, Young offers lengthy profiles of Kate Bush, Talk Talk and David Sylvian  fine musicians all, but a far cry from Fairport Convention. The book ends with avant-garde luminaries Coil, whose work is undeniably suffused with the paganism that attracted the folkies, but whose actual sound  lysergic, eerie electronica  is galaxies removed from folk. Young wants us to accept that his theme is not a specific genre but visionary musical landscapes in general. If so, various realms to which this book gives little or no attention (the misty peaks of prog rock, the fantasised Zion of Rastafarianism, the ecstasy-enhanced Eden of 90s rave) are glaring omissions.

Better to regard Electric Eden as what it is, at heart: the best of the currently available books on the modern British folk phenomenon. Despite its biases and digressions, it is a thoroughly enjoyable read and likely to remain the best-written overview for a long time. While unadventurous souls may feel Young takes them on a ramble too distant from the safety of their local CD store, I've already made several precious musical discoveries thanks to this book and I expect to make more. Just as there are unspoilt bits of British countryside hidden in the spaces between the motorways, there are musical pleasures hidden in the overgrown woods of an enchanted past.

Michel Faber's The Fire Gospel is published by Canongate.