Herb Wasserman, a noted Gilbert historian, tells a story that was related to him by Jim McLoughlin, who was the Gilbert engineer in charge of the development of the HO line and confirmed by Marshall Frisbie, Gilberts Chief Engineer. Herb noted that by the mid 30s A.C. Gilbert had rejected the idea of starting a toy train line because of the capital and engineering problems that would be presented by the introduction of a full toy train line to compete against entrenched manufacturers such as Lionel.
This changed, though as a result of a visit by Jim McLoughlin and Marshall Frisbie to a Christmas display of trains at FAO Schwarz in New York City. They were very impressed by the Marklin and Twin Trix HO trains displayed there. When they returned to New Haven, they convinced A.C. that such a train line would provide a chance to break into the market without going head to head with established manufacturers such as Lionel. A.C. gave the go ahead and the HO line had its start. While the exact date of the visit to FAO Schwarz is not certain, Herb thinks it must have been around Christmas 1936, definitely before the purchase of American Flyer by A.C. Gilbert. Herb thinks that the HO line might never have started if the opportunity to purchase the American Flyer line had been presented a year earlier.