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Hiatt was born in 1952 to Ruth and Robert Hiatt, the sixth of seven children in a Roman Catholic family from Indianapolis. When he was nine years old, Hiatt's 21-year-old brother Michael committed suicide. Only two years later, his father died after a long illness. To escape from the stress of his early life, Hiatt watched IndyCar racing and listened to Elvis Presley, Bob Dylan, and the blues.

Hiatt was picked up by the MCA label in 1979. He released two albums for the label - Slug Line (1979) and Two Bit Monsters (1980) - neither of which met with commercial success. He received a few good reviews for these albums by critics in the Netherlands. He performed at Paradiso in Amsterdam for the first time in 1979 (opening for Southside Johnny & The Asbury Jukes) and came back often and built a solid fan base. In 1982, "Across the Borderline", written by Hiatt with Ry Cooder and Jim Dickinson, appeared on the soundtrack to the motion picture "The Border", sung by country star Freddy Fender. The song would later be covered on albums by Willie Nelson, Paul Young, Ruben Blades and Willy DeVille, among others, as well as by Bruce Springsteen and Bob Dylan in concert. Hiatt was signed to Geffen (which would later absorb MCA) in 1982, where he recorded three diverse albums from 1982 to 1985. The first, All of a Sudden, was produced by Tony Visconti, and featured use of keyboards and synthesizers; his future albums combined country and soul influences. Riding With the King appeared in 1983, produced by Scott Mathews, Ron Nagle and Nick Lowe. Hiatt began making "critics choice" lists and building a large European following. The title track of Riding With the King (taken from an odd dream Scott Mathews had) was re-recorded two decades later by Eric Clapton and B.B. King and went double platinum. During this period, Rosanne Cash covered several Hiatt compositions, taking "It Hasn't Happened Yet" to the Top 20 on the country charts. In 1983, Cash would duet with Hiatt on his "The Way We Make a Broken Heart" produced by Mathews and Nagle. When Geffen failed to release the single, Cash re-recorded it in 1987 and it went to No. 1 on the US country charts. It was during this time that Asleep At The Wheel also covered the song. Ricky Nelson also covered "It Hasn't Happened Yet" on his 1981 album Playing to Win. Hiatt recorded a duet with Elvis Costello, a cover version of the Spinners' song, "Living A Little, Laughing A Little", which appeared on Warming Up to the Ice Age. Shortly after its release, Bob Dylan covered Hiatt's song "The Usual", which had appeared on the soundtrack to the film, Hearts of Fire. However, Geffen dropped Hiatt from the label after Ice Age failed to chart.
John Hiatt