Pusherstreet isn't what it used to be. The leading source of retail cannabis in all of Denmark, in one of the largest and oldest anarchic enclaves in all of Europe, is no longer the bustling, friendly spice bazaar of years gone by. There's a raw, on-the-hunt, bracing vibe here now. Young, shaven-head toughs in drab garb gather around fires in metal barrels, surreptitiously directing the illicit traffic. Mutts wander unleashed, some trained to whisk contraband away in the event of a raid by the politi (police).

Looking out of place in my loafers and sport coat, I step under a crudely rigged tarp canopy and into a makeshift hash stand where wares are displayed on a tree trunk and a wooden barrel, to query the chaps there about the changes the place has undergone. After a couple of minutes, the pusher in chief, who wears a black sweater pulled up over his mouth to hide his identity, grows weary of my questions. "Leave!" he yells with a rasp and shoves me away.

There was a time when hash and skunk were sold here from 40 stalls in an open-air market staffed by knowledgeable hepcats. But that was prior to January 2004, when Copenhagen's politi, who for years were unofficially indifferent to the trade, finally showed up in huge force to bust it up once and for all. Dozens of local dealers were jailed, soon to be replaced by rival Turkish, Palestinian, and Balkan gangs, among others.

Pusherstreet, originally named to be absolutely upfront and unambiguous about what goes on there, is the commercial heart of the Freetown of Christiania, a scruffy micronation in the Danish capital's upscale, canal-incised Christianhavn district. This notorious community of utopian rebels, who expropriated the 85-acre former army barracks in 1971, has much more to deal with these days than a crimp in its marijuana business. Christiania is facing both an existential and a property rights crisis, with an aging population of '60s counterculturalists battling a less tolerant and increasingly antagonistic national government that sees great untapped value in the commune's waterfront land. The two sides are now facing off in one of the nation's most momentous court cases.

On September 26, 1971, Jacob Ludvigsen, a young editor at the underground weekly Hovedbladet (Head), raised a guerrilla army of six fellow travelers and invaded a recently abandoned army installation for a photo shoot. In the next weekend's edition, he proclaimed that the garrison had been overrun and summoned one and all to "emigrate with bus number 8."

Denmark at the time was between weak Social Democratic governments, and the hippie incursion went largely ignored for several weeks. Ludvigsen declared the walled-off property the "land of the settlers." The new haven—named Christiania, after the bohemian, pre-1924 Oslo—was soon populated by squatters, '68ers, artists, theater people, and DIY activists. Their mission statement, co-authored by Ludvigsen, called for a self-governing, self-sustaining community where the individual takes care of the collective.

Ludvigsen didn't stick around long enough to realize the dream, splitting the scene in early 1972 after being put off by the general lawlessness of the place, the pilfering of the barracks' plumbing fixtures and the like. Invoking Bob Dylan's admonition, "To live outside the law, you must be honest," Ludvigsen tells me today that the requisite honor among thieves wasn't there yet when he left. (Ludvigsen now lives on Bornholm, an island in the Baltic Sea that he playfully agitates to "liberate" from Danish "colonial" rule.)

Yet enough order managed to congeal that first year for the settlers to negotiate a temporary agreement with Denmark's Ministry of Defense by which the squatters could continue as a "social experiment," paying for water, utilities, and upkeep costs. Those who dug in were can-do crafts folk inspired, in part, by the Whole Earth Catalog, the latter-day homesteading manual. A system of self-governance was cobbled together in which most important decisions were made by consensus reached at common meetings held in Den Gra Hal (the Gray Hall), a structure once used for military drills.

Nearly four decades later, issues of tenancy, building maintenance, dispute resolution, and collections for the common purse continue to be handled in monthly meetings for each of the Freetown's 15 designated areas. There is no real estate market, speculative or otherwise. Change of residence is transaction-free; the right to occupy a given residence is decided by vote.

There are a few prohibitions within Christiania's confines: no violence, theft, weapons, cars, rocker (biker gang) badges, or hard drugs (everything but cannabis). Enforcement is incumbent on both the individual and the collective; no outside authority is recognized. In the 1980s, following some violent incidents, including a murder, urgent common meetings were called to unite on a policy to expel the Hell's Angels and later a gang named Bullshit. Bikers were thenceforth banned from the premises and, obligingly, haven't returned without invitation and without leaving their logo-stitched vests behind. After the overdose deaths of 10 addicts in the late '70s, the community mobilized to bodily remove heroin users and dealers in the momentous Junk Blockade of 1979–80, successfully prohibiting all drugs but pot and hash ever since; the ban is enforced by the cannabis merchants.

To confront offenders, phone chains are employed to marshal an instant volunteer civil guard, like the waves of unarmed Amish in the film Witness. Knowing that males are more likely to do battle with fellow men, Christiania's women band together by the dozen in crises to relieve young demonstrators of projectile rocks and bottles.

The 1972 pact with the Defense Ministry, which called for a competition to decide long-term plans for the property, was short-lived. The following year, a new national government came to power, and the Folketing (Parliament) gave Christianites a deadline of April 1, 1976, to vacate the area. When that day dawned sans tanks or troops, the Freetown erupted in an uproarious April Fool's Day celebration involving some 30,000 revelers. Feeling their oats, the Christianites then sued the state for breach of promise over its failure to hold the promised competition, but the Højesteret (Supreme Court) ultimately ruled against the action in 1978. Through many such cycles of tightening and loosening state pressure, the Freetown has continued to stand defiant.

Today, Christiania is Denmark's second biggest tourist attraction after Copenhagen's Tivoli Gardens, attracting hundreds of thousands of visitors a year. The Freetown has become a lucrative brand: Merchants outside the enclave pay royalties to Christiania for the use of its flag (three yellow dots on a red field) on T-shirts and other gear.

Critics of the squat dismiss Christianites as freeloaders, but that isn't really accurate. No, they don't pay "rent" per se, as Kristian Lyk-Jensen of the Danish Finance Ministry's Palaces and Properties Agency repeatedly stresses when I interview him, but they do pay a monthly user fee to the state, upkeep expenses, utilities, municipal taxes, and fees for some social services normally covered by the city. They've invested their own funds in the maintenance of the grounds, reconstruction of buildings, and modernization of the sewage system, adding value to the expropriated property.

With music halls and clubs that host such world-class performers as Bob Dylan and Metallica, plus art galleries, a women's ironworks, a high-class restaurant and bakery, and a bicycle factory, Christianites also have contributed tangible value to Denmark's culture and commerce. They sponsor a free health clinic staffed by resident doctors, and an annual Christmas dinner for hundreds of the city's less fortunate. By sheltering and tending to drug addicts, alcoholics, homeless Greenlanders, and unemployable madmen, they save the state millions of kroner in social welfare payments annually.

Christiania's immediate neighbors have few of the complaints you might expect about a Bacchanalian circus next door. Julius Lund, an urbane, bearded psychologist in his sixties who acts as spokesman of the neighborhood organization called Christiania's Neighbors, tells me that his group's main priority is to limit proposed new development in the area, preserving "the green lung of the city" as a recreational park open to the public.

The more distant authorities are not so tolerant. A permissive 1989 law had allowed the colony to continue indefinitely as a social experiment, but in 2004 the new center-right government nullifed the law. The current prime minister, Anders Fogh Rasmussen of the Liberal Party, has announced his intention to bring about a final resolution. If he has his way, Christiania's 900 or so men, women, and children will finally be "legalized" or "normalized," i.e., brought under the central government's regulations.

Knud Foldschack, Christiania's pro bono lawyer, is a veteran defender of underdog causes. When it comes to defending a ragtag band of aging hippie squatters against the Palaces and Properties Agency (which inherited the Christiania issue from the Defense Ministry in 2004), Foldschack knows he has his hands full.

The suit he filed, now being heard by the midlevel Eastern High Court, seeks to establish title to Christiania by virtue of the common-law right to property by adverse possession after 20 years of continuous use. But the fact that Christianites have engaged in a series of formal agreements with the state since 1972 (regarding taxes, expenses, and the like), would seem to preclude this right by contradicting the purportedly "adverse" nature of the occupation. Add the reality that Christianites are sitting on primo midtown waterfront real estate craved by developers, and you can see why Foldschack is not especially confident that he can win. Whichever side loses, the decision will almost certainly be appealed and eventually heard in the Supreme Court. Only recently, however, it seemed as if the dispute would be settled out of court.

Ever since the Christiania Act of 2004, the government has accelerated efforts to resolve outstanding grievances with the Freetown. In August 2007, a negotiating group assembled by the lord mayor of Copenhagen came up with the Aftalen Mellem Christiania og Staten. Instead of mass evictions, as Christiania residents had feared, the aftalen (deal) called for a more moderate solution. Only a portion of the post-1971 structures would be razed, to make way for the state's plan to restore the ramparts to their original 17th century condition, while the rest of Christiania's residences would be sold by the government (still its legal owner) at a modest, belowmarket rate to the philanthropic investor-developer Realdania, which would then lease the properties at far-below-market rates to Christiania residents via a housing foundation on whose board Christianites would have the majority vote.

The enclave would be partially managed by two other "sister" nonprofits. One would control commercial, cultural, and social institutions, while the other would oversee 24,000 square meters of new buildings financed by Realdania as an experimental "laboratory" for green architecture and engineering.

Each of the three negotiators who devised this deal, including Foldschack, expected the Christianites to accept. But Freetowners were wary about the loss of control, and so chose to accept the basic framework while leaving some issues on the table for further negotiation. Such as: the fate of most of the allegedly illegal structures, the integration of some of the collectively held residential buildings into the speculative market kept outside the fortress walls for nearly four decades. Government officials took this answer as a "no" and told Christianites they'd see them in court, where the case heard opening arguments in November.

It's not as though residents don't want to end their eternal legal limbo, or that they oppose all development. On the contrary, the aging squatters say they'd like to build new housing for younger generations and continue to show off their ecological engineering and design prowess.

A team of Christiania architects hatched a development plan of their own for the community, which won the prestigious Initiative Award for the Beautification of Copenhagen in 2006 and was partly incorporated into the aftalen.

"We want to be legal," says Nils Vest, Christiania's press liaison andunofficial spokesman (the Freetown has no formal leaders), "with the right to develop our physical community on our own premises, according to our development plan, and to decide ourselves who shall be allowed to enter as new residents."

Negotiator Jesper Nygård, director of KAB, Denmark's oldest cooperative housing association management firm (which would have set up the housing foundation called for in the aftalen), warns that the graying residents are risking their best opportunity to bring in much-needed capital and avoid stagnation. "If they win the lawsuit," the jovial, round-faced executive says, "then it's like a Christmas tree without presents under it."

Foldschack, whose law-partner wife once lived in Christiania, had urged a yes vote on the aftalen with surprising vehemence, considering that he's chief attorney in the Freetown's lawsuit. "Everyone in Denmark remembers Christiania as a good thing from times past," he tells me. "Not today. I think today it is in a very big crisis. The young and the good, strong people have left. If you keep it as a museum, it will be very uninteresting."

And it's not like all of Denmark is united in making nice with the semiautonomous enclave. The nationalist Danish People's Party, which is pivotal to the government's majority coalition, wants no accommodation with Christiania whatsoever. Parliament member Marlene Harpsøe, the party's spokesperson on the issue, was scandalized by the "upsetting" cannabis trade she saw on display there on her last visit, some 10 years ago with her mother. "You can be very addicted to it," she says. "You can be very mentally ill by smoking it. It can ruin your life." Harpsøe says she's unaware of the details of the aftalen, but she knows one thing for sure: The settlement is "illegal," and its inhabitants must be evicted.

Denmark's highly homogenous society—around 90 percent of the population is Scandinavian, 95 percent is Evangelical Lutheran, and an even larger percentage is European white—has a long tradition of communitarianism. Few places could muster the social cohesion of the 4,300 residents of windblown Samsø Island, for example, who joined together during the last decade to achieve the singular feat of going carbon neutral. But individual rights are also embraced. Freedom of expression, even for extremists, is enshrined in law. (Unlike in neighboring Germany, the Nazi Party is legal here.) It should be no surprise that Denmark is the birthplace of "cohousing," a 1960s innovation in which families combine their autonomous, private living spaces with shared community facilities such as kitchens and play areas.

The nation's emphasis on community, with latitude for quirky, even renegade applications, goes a long way toward explaining the phenomenon of Christiania. Even the enclave's "national anthem" celebrates both collective purpose and individual freedom, albeit with tongue-in-cheek naiveté and paranoia: "The only place with freedom enough for everybody…/ Rumors try to smear Christiania / People get filled with shit about us / Thousands are taught to hate our guts / Without knowing who we are."

Off the distraction of Pusherstreet and onto Christiania's footpaths and cobblestone roads, one can see that the settlement is a society of artisans who respect both the seaside ecology and the preindustrial, Hobbit shire–like architecture of the place. I had an opportunity to enjoy the warm, spare, and humbly elegant aesthetic of the enclave's built environment (on display in the coffee table book Christiania Interiør) at the invitation of Nils Vest and his wife, actress Britta Lillesøe, unofficial cultural coordinator for Christiania.

Vest, a ruddy-faced man in his sixties, earns his living making historical documentaries for schools and Danish television. He is soft-spoken, thoughtful, and wary; he says Christiania is frequently burned by the mainstream press. Lillesøe is theatrical and maternal, a night owl tending to the needs of her chicks in the wee hours. Both are veteran players in the theater group Solvognen (Chariot of the Sun), a national treasure that has mounted spectacular staged events in the city, such as a faux occupation by NATO troops in 1973, captured in Vest's brilliant satirical film Five Days for Peace.

Over Lillesøe's beef stroganoff and several bottles of French wine, we discuss their work as cultural ambassadors, in which capacity they organize massive, enclave-wide open houses, seminars featuring distinguished Danish citizens, and meet-the-folks events in their home attended by decision makers of every major political party. Vest snorts at the widely held notion that Christianites need to follow the law like every other Dane. "It's bullshit that the state doesn't make special arrangements and allowances for certain people," he argues. After all, he says, there are "different legislations"—subsidies, permissions—governing farmers, industrialists, and owners of historic houses in need of repair.

With charges of usurping government property constantly hanging over their heads, you would think the Christianites might not risk expulsion by openly distributing illegal drugs. But marijuana is the very DNA of Christiania, the gold standard of its value system. The first coin of its realm was the 35-kroner silver fed ("fat," slang for a toke); it reflected the price of a gram of hash at the time. Fri hash (the freedom to consume and trade cannabis) might be the Freetowners' defining choice, the stand they took that really sent them up the nose of the authorities while also giving them the defiance to fight.

Christiania's solidarity embraces even the often intimidating pushers. "It takes some of all kinds to make the world, and so it is," the militant old-timer Dorte La Cour explains. "We are gangsters and holy men and women and hippies and straight people, hard-working people, artists, and people who drink and smoke too much." (Vest is somewhat more fatalistic. "We found out here that market forces are stronger than our hippie ideals," he says.)

Since the 2004 crackdown, cannabis sales have spread "off campus," away from Pusherstreet. Outside Christiania, those who seek a nugget of hashish might now be offered a bag of heroin, cocaine, or meth. Drug-related gang violence has risen across Copenhagen. In 2005 a Christianite was murdered by a gang member, a byproduct of the battle to re-establish Christianite control in the vacuum created by the government's anti-drug crackdown.

Michael Kragh is police commissioner for Station Amager, the precinct with jurisdiction over Christiania. A friendly young officer with a spry build, blue eyes, and a quietly steely demeanor, Kragh confirms that "it's impossible to stop very much of the drug sales" in Christiania, estimated in The Financial Times at more than $70 million annually. "We'd have to be there 24 hours with a large force, and that's not possible," he says. "We make some small operations to show the inhabitants that we can come in anytime and take some dealers and some buyers. In a way yes, it's symbolic." (An average of about 161 grams a day were confiscated in 2007, according to his statistics.)

The gang wars, Kragh concedes, were "not happening before the closing of the stalls in 2004. The gangs have gotten stronger since then, because they sell harder drugs and there's more money than there was before." Still, he maintains, "we never find hard drugs in Christiania." The commissioner is proud to combat what he believes is a harmful threat to Danish society, particularly to children, but he has no illusions about solving the "drug problem," in Christiania or elsewhere, until "the politicians decide" how to resolve the issue, either by sending in enough force to squelch the trade once and for all or finding some limited legal accommodation for it.

An intense man in his 50s with movie-star looks, shades, and a suede jacket, Per Smidl is the author of The Sacrificial Blood of Welfare, a controversial 1995 book that is, by Danish standards, a shockingly deviant indictment of a machine-like state that bulldozes individual rights. The book chronicles his Kafkaesque wrangling with the Denmark tax authority, an altercation that led to a 12-year self-imposed exile in Prague. A former Christianite who participated in the Junk Blockade, risking death at the hands of gun-toting heroin dealers, Smidl has just returned to Denmark. He credits the Freetown with saving his sanity. "I've heard many people say that Christiania saved them when they were at their wit's end and didn't know where to go," he says. "I'm one of them. When I was a young man of 25, Christiania was the place where I could set a new direction for myself."

When he learns I am researching this story, Smidl contacts me to say he has an urgent message: The enclave must survive the normalization campaign. "If Christiania is gone," he says, "we lose the last foothold of freedom in Danish society. Christianites represent a way of old Nordic society, almost tribal. There's something characteristic about all [its] people, as much as they vary. They stand on their own two feet, they know who they are, they're able to build their own house, they walk with their heads up, they're undaunted by political power, they're anti-authoritarian, they will meet and speak their case, they are examples of people who have retained freedom of expression. This is the only area in Denmark where you'll find this almost extinct species of Dane."

"I can't see myself living in a country that doesn't have room for a place like Christiania," KAB's Nygård agrees, echoing a sentiment I heard from young and old.

"They do not dare to close Christiania forever," predicts Ludvigsen. "That would cause a civil war in Copenhagen…and be a shame for the image of Denmark."

The colorful Dorte La Cour, a grizzled veteran of Christiania's wars for survival, is the queen of the truculent naysayers, a successful visual artist who left her husband to move here three decades ago. I have trouble finding her house on an unmarked path called Bjørnekloen (Bear's Claw), where it seems every house is numbered 69. (There are no official house numbers in Christiania.) I catch up with her as she is returning from a waterfront cleanup she organized in her imperious manner. (She asked me to join the crew. I declined, being short on time and overdressed for the occasion.)

La Cour tells me she was determined to quash the aftalen, showing me a T-shirt she designed that said "Nej" ("No") in quaint 18th-century calligraphy. It was a nej to normalizing, to social housing and its bureaucracy, to politi—to everything imposed on Christiania by the corrupt, envious society outside. La Cour brought in new lawyers to help with the lawsuit, because Foldschack, nice as he is, just doesn't get it.

Christiania has the broad support of the "media elite," the movie stars, the glamorous big-name architects and academics, the intelligentsia at large. T-shirts reading "Forsvar Christiania" ("Defend Christiania") are worn throughout Denmark. Even the Copenhagen city council has said it won't approve anything that the Freetown doesn't. If the Freetown's cause is lost in the courts, the city could see hundreds of thousands of civil libertarians marching to save Christiania.

"Fuck Realdania," says La Cour. "We don't need their money. We'll take the case to the people."

Charles Hayes is the author of Tripping: An Anthology of True-Life Psychedelic Adventures (Penguin). His website is psychedelicadventures.com.