The man in front of me has fear in his eyes. Fear, suspicion, and something else, something more subtle, that I realise after a few seconds is pity. It is the evening rush hour in London and I am standing in the middle of Carnaby Street holding aloft a placard that reads: "Free Hugs". My mission is simply to reach out to strangers, clasp them close and make them feel better about their day – no strings attached. But this man isn't convinced.

"What are you selling?" he asks.

"Nothing," I explain. "We're just offering hugs to people. For free."

The man slips his iPhone out of his jacket pocket and takes a photo, as if he cannot quite believe what he is seeing. I open my arms in what I hope is a welcoming, earth-motherly fashion. I remember what I've been told in the pre-hugs briefing by the group co-ordinator: smile, but not so much that you look psychotic, and don't take offence if someone doesn't want to hug you back. I wait. The man looks uneasy, a bit embarrassed and then, unexpectedly, his face breaks into a smile.

He hugs me. And although I've been secretly dreading the moment when I'll have to engage in a surprisingly intimate act with a stranger who might have all manner of personal hygiene problems, I discover that it's a nice feeling. We hold each other for a moment, then release. We exchange smiles and I watch as he makes his way back down the street. I like to think there is a certain lightness in his step that wasn't there before, but it's probably just that he's walking more quickly in order to get away from the crazy woman with the "Free Hugs" placard.

The story of how I got to be here, pressing flesh with random pedestrians, is an intriguing one. It is a story of how, eight years ago, a man from Sydney set out to bring us all a little bit closer and founded the Free Hugs movement. It is a story of how the idea caught hold of people's imaginations across the globe and made him famous. It is a story of how he set out to spread free love but ended up in a battle of bitter recrimination over money. And it is a story, ultimately, about how you can start with the best of intentions and yet end up disillusioned.

In June 2004, an Australian who went by the pseudonym Juan Mann started giving out free hugs in his local shopping mall. Mann had reached a point of personal crisis in his own life: his parents had divorced and his fiancée had broken off their engagement. He realised that people were living increasingly disconnected lives. The need for human contact had been neglected. In Mann's eyes, we were living in a computer-mediated culture where friends were made through MySpace and families were breaking down. Where previously small-scale local communities had been integral to individual wellbeing, now people were pursuing far-flung separate lives in different corners of the globe.

Mann hand-wrote a sign advertising Free Hugs and went to the Pitt Street Mall in central Sydney, where he stood for 15 long, lonely minutes before an elderly lady took pity on him. Her dog had just died, she confessed, and the hug had made her feel better. Soon Juan Mann was handing out hugs every few seconds. As the days passed, more volunteers with their own handwritten signs came and stood alongside him.

Shimon Moore was one of them.

"I had a job holding a sign advertising a sale on shoes," Moore says, speaking to me from his home in Los Angeles. "I saw this guy offering free hugs one day. I thought it was a great idea, so I started talking to him."

Moore wrote songs in his spare time and was the lead singer for a band called Sick Puppies. The band was looking for a record deal, so Moore took his father's video camera to the mall and started to film Juan Mann with the idea of making a music video. Free Hugs had started taking off: every day, hundreds of shoppers would stop to be hugged by the anonymous man with the home-made placard. By October the police had got wind of it and threatened to ban the movement. Ten thousand people signed a petition. The police backed down.

Moore filmed it all. When he and his band, Sick Puppies, moved to Los Angeles in March 2005 in search of a record deal, he edited the footage, set it to music and sent it back to Mann in Sydney as a present. Mann posted the video on YouTube and it went viral, attracting 70m views.

"I had a feeling when I was making it that this was good, that it would connect with people – and that doesn't happen often," Moore says now. "I did it in one night. It was just really flowing."

The YouTube video made Juan Mann into something of a celebrity and his campaign attracted global media coverage. By 2006 he was being interviewed by Oprah Winfrey and Free Hugs was going international: branches sprang up in Taiwan, Israel, Italy, America, Switzerland, Norway, India, Portugal and the UK. It seemed to touch a nerve.

In Philadelphia a sociology professor called Faye Allard set up her own Free Hugs spin-off and explained its appeal. "The success of the movement reflects the fact that we're all becoming increasingly isolated," she said. "Households no longer contain extended family, people stay single for longer and have children later. This is compounded by the fact that we have become more geographically mobile… Phones, the internet and email mean that much of our personal contact is reduced to electronic interaction. What the Free Hugs movement does is restore a sense of community in a society of disparate individuals. It gives us a sense that we belong."

Off the back of the YouTube video, Moore and his band got a record deal. They started selling Free Hugs merchandise at their gigs – T-shirts and mugs emblazoned with Juan Mann's distinctive handwriting. Mann wrote a book – The Illustrated Guide to Free Hugs – became an after-dinner speaker and published his address and mobile-phone number online, offering to go for a meal with anyone who contacted him. For a while, everything was good.

But then it all went quiet. When I attempt to get in touch with Juan Mann, he seems to have disappeared. I try sending him messages through his website, his Facebook profile and his Twitter account. I call the number he published online and the line goes dead. I contact his friends, none of whom will tell me his real name. They tell me Juan hasn't been in touch for a long time. There are a few dark murmurings about him "flipping out" and going to live in a surfer's community north of Sydney. One of them gives me another phone number and that doesn't work either.

Eventually I track down a brief interview Mann gave to a New York-based business news website in 2010 in which he claimed Shimon Moore had screwed him over financially by getting him to sign up with the same management company that represented Sick Puppies.

"I complied, believing that Shimon, as my friend, would make certain that we were both amply compensated for the video and the Free Hugs merchandise the band sells," Mann said. But according to Mann, that didn't happen: he claimed all the earnings went straight to Moore and his band members.

"Needless to say," Mann continued, "we aren't friends anymore… I haven't seen a dollar from the band, nor the manager."

When I speak to Moore, he is clearly uncomfortable. "That's a touchy subject," he says over the phone. "I haven't commented before because I don't want to fuck up the brand. The truth is, we had a falling-out over money… Juan flipped out and got lawyers and stuff. He totally changed when he got famous, and it messed up our friendship. But I don't want people to focus on that because Free Hugs is supposed to be about love, not two guys bickering."

Moore seems genuinely distressed about the falling-out. He loved Free Hugs.

"It wasn't a Christian thing or a colour thing or a cultural thing in one country," he says. "Everyone likes a hug no matter what, no matter how broken you are.

"It's just a shame because it was Juan's thing: he made it, he started it." He sighs. "But the beautiful thing now is that it's so much bigger than any one person."

He sounds as if he is trying to persuade himself. And yet it is true that the concept of Free Hugs has been extremely influential. People still stand on busy streets holding placards in much the same way as Juan Mann did all those years ago. Majella Greene, a former social worker, founded the London-based Guerrilla Hugs in January 2010. She is currently studying for an MSc in Positive Psychology and is interested in the positive impact touch can have on human interaction.

"My concern is that as we get older, as children grow up, the amount we experience positive, platonic touching reduces," Greene says when we meet in a café with other volunteers who have given up their time to hug total strangers of a Thursday evening. Greene is an enthusiastic and bubbly speaker, much given to expressive hand gestures. I get the impression that most of the people round the table have been won over by the sheer zeal of her personality. "In the UK, there's this moral panic about physical contact with other people, either in the workplace or with children because of concerns around sexual harassment or worries that teachers are going to be accused of paedophilia," she says. "You've got a generation of children growing up playing computer games without being able to take part in normal rough and tumble that builds up alliances."

Greene cites research by the psychologist James W Prescott, who claimed in the 60s and 70s that the lack of affectionate contact between mothers and infants could result in permanent brain abnormalities associated with depression, substance abuse, eating disorders and violence. More recently the evolutionary anthropologist Robin Dunbar found that primates groom each other for longer than they need to in order to cement bonds, make friends and influence fellow primates.

"I think that's true of human beings as well," explains Greene. "If they experience non- sexual physical contact, they're more likely to feel protected and protective of each other."

Greene says that everyone has their favourite hugging story. "I hugged an older man a while back whose wife had died 14 years ago and he hadn't been hugged in all that time," she recalls, looking distinctly misty-eyed. "He stood talking for ages about how he'd not been held or touched and how it made him feel better that I had… When people turn round and say: 'Thank you, I really needed that,' it makes me want to cry."

There is a sense that such acts of gentleness are having a necessary comeback after decades of aggressive self-interest and self-promotion. Perhaps it is partly allied to the economic crisis, to a new-found respect for the simpler things in life that do not need to be bought with a credit card. For years we worshipped at the altar of conspicuous consumption in an age when fame was accorded for marrying a footballer or appearing on reality television, and when friendships were made and lost at the click of a computer mouse. These days we take more delight in the everyday kindnesses, in the shared experience.

That, at least, was the thinking behind the artist Michael Landy's recent project, Acts of Kindness, in which he invited members of the public to submit stories online of kindnesses they had witnessed or been part of while travelling on London Underground.

"People can exist in a bubble on the tube," he explains when we meet for a coffee at the National Gallery. "They're reading their paper or listening to their MP3 player and everyone is cut off from each other, trying not to make eye contact. It's partly what you have to do to survive in a city like this, but I was surprised by the response I got. Often we feel that everybody is out for themselves, but that isn't the case at all."

Landy received countless stories: of women crying after the break-up of a relationship and being offered a smile or a reassuring squeeze, of someone making an origami bird and dropping it into the lap of a person who looked lonely, of strangers helping with heavy luggage.

"I was interested in that emotional bridge between self and other," Landy says. "Every now and then, someone does something kind, and it's life-enhancing because you're mixing your emotions with complete strangers."

Back on Carnaby Street, my efforts to mix my emotions with complete strangers are gathering pace. Some people walk past the Guerrilla Huggers with understandable wariness in their eyes. Others – and it is disproportionately young women in their 20s – get the idea immediately and hug me without my having to explain. A handful of shop assistants pop out to have a hug in their cigarette break. A Belgian tourist with a camera slung round his neck tells me there should be more of this kind of thing. I get hugged by a nine-year-old boy, a pensioner and a member of the French Olympic boxing team who explains he is very sad after having lost his match. Every single hug makes me smile. I enjoy it far more than I thought I would.

As I'm standing there, handing out hugs to people I've never met before and will probably never meet again, it strikes me that there's an obvious irony in the fact that a movement predicated on free gestures of intimacy should have been riven by in-fighting about money between the two men who made it happen. But maybe it doesn't matter. Like most of the best ideas, Free Hugs has gathered its own momentum. After all, it was always meant to be bigger than just Juan Mann.