I saw this movie back in the early 70s. All I really remember was that a family (teacher) came to this small hidden town where they had very little contact with the outside world. The children all dragged their feet and no one was ever happy or allowed to have fun or laugh cause of some thing that happened in the past.
I remember one of the young boys playing a flute in the one room school and all the puppets began dancing and he began floating until one of the elders came in and he and all the puppets fell to the floor. and he got hurt.
I got the idea that they were actually immigrants from outer space who were hiding on earth – trying to hide away from people finding out about their powers.