Jim,
Until WWII the N word wasn't particularly seen as a racist word in Britain, hence the perfectly widely used saying 'N in a woodpile'. Dark-skinned people used this word to describe themselves and all sorts of innocent expressions included the word. I think the word started to be recognised as a derogatory word when the white American servicemen came over in WWII and used it in this way. Therefore there is no anomally over your anti-racist granparents using it.

BTW I have been going to Whitby since the second festival in the late 60s. It's a long shot but I just might know people who have old recordings of what went on in the early festivals, or have memories of your uncle. What was his name please and where was he from?