I have seen the phrase "Gay as Dad's old hatband" more than once in twentieth century American fiction. I think it is playing on the double meaning of gay, but what is the happy (bright colored?) hatband that is being referred to?
Quote found in "Needful Things" by Steven King (1991)
"George T. Nelson, the high school wood shop teacher. George T. Nelson, who, under his bluff, macho exterior, was just as gay as old dad's hatband."
Steven King must really like this phrase. A Google Books search also lists it in "The Dark Tower" and "Mile 81".