Actually, I'm pretty sure Karl Rove has something to do with it. Something about UFO's too, but I'm not at liberty to say.
That record of which you speak is one of the big HM collectibles, of course. Got mine sometime in the Fall of '69 and still have it. Anyway, those lines you quote are probably the biggest single reason that the HBG is a cult figure today. He is prominent not only in that piece of narration but in the artwork for that very popular album. (This is also true for the little kid's HM record, btw.) So countless kids grew up not only loving the HM but also hearing and reading about a ghost that obviously isn't there, and wondering why. The
absence of the HBG is highly conspicuous. Of such things are legends made.
As for the effect, what you've always heard is true. I suppose that they were able to make the face appear and disappear convincingly in the shop, but the ambient black lighting in the attic and the proximity to the riders made it impossible to get the face to truly disappear using only lighting techniques. When I saw the HBG, I had not yet bought the record, and so I had no idea or expectation that his face was supposed to vanish. The head in the hatbox appeared, but I didn't notice that the one on his shoulders was doing much of anything. So yeah, the effect didn't work as planned. I would suppose that they fiddled with the lighting for awhile to see if they could get the thing to fly, but after a week or two or three, they just decided to yank the guy.
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