Parents of small children become inured to their behaviour. What they think is cute and endearing, other people who aren't their parents can find intensely irritating.
I have to ask, Freddie - how old are your children?
I don't know anyone - honestly; anyone - who thinks their own annoying, bickering toddler behaviour after a long day out (especially at the in-laws) is 'cute' and 'endearing'. 
Only the most deluded PFB type (the type that you read about on here but never actually meet or know in real life) thinks their child's over-tired bickering is 'cute'. Any half-way normal parents finds it as irritating as everyone else. More so because it comes with the added pressure of being the one that has to step in, sort it out, and stop it.
I honestly don't understand the dynamic of some families on this thread. All this 'you shouldn't have let it escalate that far', 'you should have had them under control', 'you should have handled it instead of your DH', 'you should have done X', 'you should have done Y'...
No - the FIL should not have resorted to his clearly age-old bullying tactics towards someone eles's children. He was in the wrong. No-one else. He was. You simply do not behave like that, and the very fact that the OP's grown husband was scared rigid by his behaviour says it all.
Stop excusing the FIL, and blaming the OP, her husband, and their 2YO and 4YO children.