It is a sweltering August evening and I am perched on the edge of a bouncy castle in the grounds of a child-friendly hotel near Newquay. I'm supposed to be on holiday with my wife and kids, but instead I'm listening to Sly Stone tell me about his new idea for a band, a band he claims will be "even stronger" than the Family Stone.

This is obviously quite a boast. Between 1967 and 1975, Sly and the Family Stone not only sold millions of records, they changed the face of pop music. They were America's first major racially integrated rock band, driven by a leader who seemed to have gone out of his way to recruit not just a mixture of black and white musicians, but the biggest misfits he could find: Cynthia Robinson, a female trumpet player in an age when women didn't play the trumpet in rock bands or indeed anywhere else; Jerry Martini, a long-haired, sandal-wearing hippy saxophonist, who says he'd been "an outcast" in school for loving R'n'B instead of Dave Brubeck. "I wanted people to look onstage and see the world and how the world can get along," says Stone today. "If they could see us, see we were having fun, it might make it easier for them to catch on."

Everything about Sly and the Family Stone was spectacular. They looked spectacular – a riot of afro hair, violet wigs, satin, tassles and sequined capes. On YouTube, you can see a remarkable clip of them from the Ed Sullivan Show in December 1968, playing a medley of their hits – Everyday People, Dance to the Music, You Can Make It If You Try, I Want to Take You Higher. At the climax of the performance, Sly and his sister Rose run from the stage and dance wildly in the audience, who are largely white, middle-aged and aghast at what's going on in their midst.

Sly Stone performing at Woodstock. Photograph: Lee Marshall

They sounded spectacular, too. Their fusion of soul, funk and psychedelia was so potent and groundbreaking and successful – between 1969 and 1970, they sold 8m albums – that even Motown was forced to change its approach in their wake: out went the label's trademark sound, in came records that sounded, well, more like Sly And The Family Stone. Even their demise was spectacular. No band seemed to embody the curdling of the utopian 60s counterculture dream into paranoia and bleak, joyless hedonism quite as starkly as Sly and the Family Stone.

Around the time of the Ed Sullivan performance, Stone relocated from the band's base in San Francisco to a mansion in Bel Air. He surrounded himself with guns, dangerous dogs and a coterie of personal assistants and bodyguards who were, at best, highly dubious and at worst actual mafiosi. He sank ever deeper into drug use – not just cocaine, but PCP – and developed a reputation for unreliability and erratic behaviour. He still managed two more incredible albums, 1971's There's a Riot Goin' On and 1973's Fresh, but band members began leaving – bassist Larry Graham allegedly fleeing in fear for his life after an altercation with some of Stone's hired goons – and Sly and the Family Stone split up. By the end of the decade, Stone was releasing albums whose titles seemed to both acknowledge his increasingly grim reputation and smack of desperation: Back on the Right Track; Heard Ya Missed Me – Well I'm Back!

It's a remarkable story for any band to live up to, but then Stone's new idea sounds pretty remarkable too. "You know what? I'm looking for albino musicians," he says. "My feeling about it is that it could neutralise all the different racial problems." At first I think I've misheard him, which is remarkably easy to do. At 70, his voice is raspy and slightly slurred, perhaps the result of decades of hard living, or maybe something to do with a bizarre accident some years ago, when he apparently fell off a cliff in Beverly Hills while eating a plate of food: he declined to be treated for the injuries to his neck, a decision that has left him in constant pain unless he hunches over, his chin on his chest. Coupled with a patchy mobile phone signal and a bad transatlantic line, I occasionally lose the thread of what he's saying entirely. But this time I've heard him loud and clear. "To me," he continues, "albinos are the most legitimate minority group of all. All races have albinos. If we all realise that we've all got albinos in our families, it's going to take away from the ridiculous racial tension, if you're black or you're white, blah blah blah. That's why I've been trying to look for albino musicians and organise a group of people that are going to be right. That's what I've been rehearsing for. People will see us, all of us together – a real family, an albino family. People will get happy when they see that! People," he says firmly, "have got to be happy for that."

It goes without saying that I never expected to discuss albinism with one of the most elusive, fascinating and mercurial figures in rock history while sitting on a bouncy castle outside a hotel in Newquay. In fact, I never expected to speak to the former Sylvester Stewart at all, even though he has a new release to promote. Not a new album. There hasn't been one of those since 1982, unless you count the desultory CD featuring remakes of his hits that he put out a few years ago on a small independent label. Instead, there's a lavishly-packaged four-CD retrospective called Higher!, which charts his musical career from its beginning as a local radio DJ turned budding record producer in the early 60s, right up to the mid-70s.

The Family: Errico, Rose, Sly, Cynthia Robinson, Freddie Stone, Jerry Martini and Larry Graham. Photograph: Bob Cato/Sony Music

The original plan was that I would just speak to his sister Rose, who sounds every bit as cool and insouciant on the phone as she did 42 years ago singing Runnin' Away, a song about a doomed attempt to escape fate that she performed in a blank-eyed sing-song voice, disturbingly at odds with the lyrics. She talks vaguely about the band facing "their own personal challenges" in the early 70s. "Not really deep problems," she adds, airily. And I speak to, Robinson, Martini and drummer Greg Errico, who still tour together as the Family Stone. Between them, they tell tales about the early days, when not everyone they encountered was, as Robinson puts it, "into seeing different races having fun together": "one time, me and Jerry walked by a barber shop, Jerry with his long-haired hippy look, me with my Angela Davis afro, and they ran out the store with razors. We had to run! We hadn't even said anything to them!" But the most striking thing is the awe and reverence in which they hold their former bandleader. "He's like Superman, literally," offers Robinson. "He's got x-ray vision." "He affected my life second only to God," says Martini. "Why don't people try to love him for what he did? He had so much to offer the music business and the world in general. Why is everybody concentrated on drugs or this or that?"

When the record label intimated that Stone would be willing to talk, it still seemed highly unlikely. Stone, in effect, vanished from public view in the early 80s, only cropping up in the news when he was arrested for cocaine possession or missed a court date. There was a brief flicker of activity at the end of the last decade, when he began performing live again, appearing for a few songs during shows by bands featuring various permutations of the old Family Stone lineup, with decidedly mixed results. For every night when something of the old magic fleetingly sparked, there was a disaster like the 2010 Coachella appearance, which took place just after lurid reports appeared in the press suggesting Stone was impoverished and of no fixed abode, living in a camper van parked on a street in East LA. At Coachella, Stone lay on the stage, mumbled incoherently, launched into a rant about his former manager that subsequently occasioned a lawsuit and started and stopped songs apparently at random. "It wasn't a good experience," says Errico, who played that night. "He had convinced everybody … I mean, they were looking to put together a whole tour on the other side of a successful show and … you know …" He lets out a defeated sigh. "When you have an experience like that, it's like the dark side of it … the result of the chemicals and all that. It's taken its toll and it lives right in front of you there. You don't want to go there."

The negotiations to get Stone to the phone stretch on for weeks. By the time I finally receive an LA mobile number it's long past my original deadline and into my holiday – the only place I can find a halfway decent mobile signal is in the adventure playground at the rear of the hotel. But after 12 hours of getting through to his answerphone – "You called. Or did you? We'll call back," it announces, with no option to leave a message – Stone finally picks up. Alas, he doesn't seem terribly pleased to hear from me. "I don't give a fuck what you heard, I ain't telling you anything," he says. He'll only do the interview if he's paid. "You guys send me some money, fair's fair, I work. I don't give a fuck about anything." He puts the phone down, and that appears to be that.

Sly Stone in 1973. Photograph: Legacy Recordings/Sony Music Archive

The next day, however, I'm given the number of someone called Neal Austinson, who describes himself as Stone's archivist/road manager, the latter a job which sounds as challenging as you might expect. "I don't know if you've seen the film Get Him to the Greek," he laughs. "A lot of similarity there. It was like those guys had followed me around, you know."

Stone, he says, is in good health and "for the most part" clean of drugs – "he likes to smoke a little weed and maybe have a cocktail before he gets onstage, but he's 70 years old, he can't do what he used to do, no one can at that age. And you know, coke is a very expensive habit to maintain." He is still resident in a camper van, albeit out of choice. "When all those stories were being published about him, he had a beautiful home near Hollywood, but he wanted to live in the camper. He likes to be able to just keep moving. Like he says, if things get weird, then he just goes somewhere else where things aren't weird. He's not destitute. He doesn't have the fortune that you would like to think a rock star would have because too many things are in litigation right now. But he pretty much gets what he wants, he lives comfortably."

He tells me that Stone has "a thousand new songs on his hard drive" and "a lot of real interesting ideas, concepts. At one point, he wanted me to find some ninja chicks to act as a security force for him. Ninja chicks and clowns. He had this idea that he would like to musically tutor the children of royalty, because he feels that's where he could make some good money." More importantly, he manages to coax Stone to the phone, abetted by the fact that his record company now appears to have paid him to speak to me. Certainly, he's in a markedly better mood than the previous day, greeting me in an English accent ("to whom am I speaking?"), upbeat about everything from his mythic reputation – "God, yeah, there's all kinds of stories about me, but it doesn't bother me, it's interesting" – to his variety of ongoing lawsuits against former managers and business associates. "I don't care about that bullshit, man. Man, that's boring. I don't even need the money that people are suing people for. I just want my tools, so I can earn money. I'd rather have that than the result of a lawsuit."

Contrary to the impression you'd get from the cameraphone footage of his Coachella appearance, he is both lucid and wryly funny, if occasionally his version of events differs markedly from everyone else's. The move from San Francisco to the Bel Air mansion, which Errico had told me flatly was "the beginning of the end", was according to Stone: "really good … beautiful. There were a lot of musicians there. It was great." Still, he concedes, there were some problems. "People told Larry that I was going to kill him. That was so far away from my head, I don't know why people would say that. It was impossible for me to even think that. Maybe they meant it as a joke. He just got a little afraid, that's all. But he's a great bass player and I figured when he realises that I'm not going to kill him" – he lets out a wheezy laugh – "he'll be back."

He talks about the Family Stone's legendary appearance at Woodstock, where by all accounts they stole the show: coming onstage at 4am, luring the audience out of their sleeping bags and on to their feet. "It was scary. More and more people kept turning up. I didn't know where to go if I wanted to buy some food," he chuckles, "although there was a lot of people advertising which kid you could go to to buy acid. So I was scared. Hey, listen, Jimi Hendrix was there, all sorts of other people. I knew my place. Just to be around Jimi Hendrix … shit. I didn't want to be running my mouth off, too much talking. I hate that kind of shit. I just wanted to play the best we could, and that's what we did."

After Woodstock, he appeared to have it all. And then, inexplicably, he started to throw it all away. The issue wasn't that his music suddenly became noticeably less commercial, although it did. By 1971's There's a Riot Goin' On, he had systematically divested his sound of its bubbling exuberance and replaced it with something profoundly creepy: the music on it is incredible, but it's redolent of stoned listlessness and small-hours paranoia, of curtains drawn to shut out the dawn – not, he insists, as some kind of despairing social comment on the fading of the hippy dream, but because of his disillusionment with the music industry. "We were in showbusiness. Once you get a hit group and once you get hit records, there are a lot of people who want a part of that. And then you get the haters. It's like a book. It needed a new chapter." Uncommercial or not, There's a Riot Goin' On went straight to No1 in the Billboard Pop Albums chart.

Sly Stone performing at Coachella, 2010. Photograph: Charley Gallay

Although blessed with a vast audience devoted and open-minded enough to follow him down ever-more obscure musical paths, he seemed intent on alienating them, regardless. He started turning up to gigs late, or not at all, necessitating their cancellation with the audience already in the venue – in 1970, he missed 27 out of 80 shows – ruining the band's reputation in the process. Quite why is a matter of debate. Some people thought he was just suffering from a lethal combination of arrogance and being permanently out of his mind on drugs. Martini tells me that he thought Stone's behaviour was all somehow linked to the commercial failure of the band's 1967 debut album, A Whole New Thing, a notably different-sounding record to any of its successors: afterwards, his label insisted he came up with a straightforward hit, which he did, in the shape of Dance to the Music. "When he started, he started with his heart and his mind wide open and he got down right away by the powers that be in the music industry, and it kind of broke his heart. We had a lot of success, but I think it damaged Sly morally. It hurt him that he wasn't able to use his true genius to go in the direction that people like Herbie Hancock and Miles Davis did." But once again, Stone says otherwise. "Nah, I was trying to be too complex, too musical. I was trying to be Bob Dylan too. But you know, Dylan had the words and he just kept the music simple. He knew how to do that. But I'll tell you this, I knew how to do it after that album, didn't I? OK, I'll boogie down. All you've got to do is give them the music that they can hear and they can dance to, and that's what we did. Dance to the Music!"

Stone claims the missed shows weren't always his fault. The other members of the band were losing interest – "people get boyfriends and girlfriends, they start acting differently" – but "if you're the leader, you take the acclaim, you should take the blame". "Do I have any regrets?" he says. "Shit, yes, I have regrets." There's a long pause. "I just can't think of one now."

Anyway, he says, he wants to focus on the future. There's his project to recruit an albino backing band to think about. Austinson had seemed doubtful whether the thousand songs on his hard drive would ever see the light of day – "I don't think dealing with a record label and all those things are that appealing to him" – but Stone says otherwise: "I've got a few reasons why I've got to maintain stability. I've got into wanting people to hear my music. I've got something I want people to hear because I know they'll like it. They've gotta like it! The songs I've been writing are the sort of things you have to like."

I start to ask another question, but he interrupts me: "Have I talked to you enough now? I've got to go to the bathroom. You asked me about regrets," he says, with another wheezy laugh. "If I don't take a big shit now, I'll regret that." And with that, he's gone: perhaps the last of rock's great enigmatic geniuses, heading to the toilet with his mystery more or less intact.

A few days later, I speak to Neal Austinson again. He tells me that after the interview, Stone asked him to contact me again. They'd got on to the subject of his plan to become a music tutor to the children of royalty, which Stone seemed to think I might be able to assist him with. "He said, why don't you talk to that guy in England, see if he knows any royalty?" He laughs. "Just because you live over there! Sly Stone," he adds, perhaps a little unneccessarily, "he's quite the character."