So my question now is, if the magic, unmovable pin is in the bypass position, then can you plug the two filter lines without starving the engine of oil and roasting its innards?
Carl
Yes
If the 261 came from the factory with the "pin/plug" moved and the full-flow oil filter installed, woe will be unto you if you disconnect/plug the oil filter ports/holes on the block.
The other question is: obviously the block was available from the factory with that pin/plug in place - but how/why (as a replacement block/engine)? Standard original-equipment 58-63 engines are shown in Shop Manuals as have the full-flow filter from the factory.
1958 261, for example 1960 261 filter description 
