"..as merry a band of children as I had ever seen before or since".
Your evaluation is correct, in this instance "merry" means "happy".
The word is used less frequently in modern English than perhaps it once was, except perhaps at Christmas. It is sometimes used idiomatically to describe someone who is slightly drunk.
Its use in your example though is also idiomatic because it appears alongside the term "band" (meaning group), and "merry band" is a recognisable old-fashioned term that is sometimes used. I suspect it may be a reference to the legend of Robin Hood and his band of merry men.
So in its entirety it means that the writer has never seen such a happy group of children before; that is to say they were the happiest children he had ever seen, not the happiest that he had seen that particular group.