Steve6443 (#3883) and pic,
Shows the 2-pitch propeller on the Lycoming very well. It is now in the "coarse" position, to which it returns on every switch-off. On starting (providing the cockpit control is on "fine"), the cylinder, of which you can see the top "cap", moves outward under oil pressure, the two bob-weights move to the other end of their travel, and the blades turn into fine pitch.
You would use this position for take-off and climb to cruise, then move to "coarse" for en-route flight (I had exactly the same arrangement on the prop of the P&W "Wasp Junior" which powered the Vultee BT-13, on which I flew 60 hours at USAAC Basic School).
It seems odd that an engine which had hauled the Stearman off the ground at Winston should "lose power" shortly after take-off (a complete failure would be more understandable). As the "contaminated" fuel explanation seems to have been discredited, we must seek for other causes. The Pilot stated that it had "lost 300 rpm". This is exactly the result I would expect had the pitch control been accidentally moved to "coarse".
I make no implication: perhaps some flying instructor with experience on two-position props might like to comment on my remarks above.