Yeah, lots of people have 261's configured for bypass filtration. That is exactly how it's done. Pretty exciting for you I am sure. Two issues if you decide to go with full flow filtration:
1) Going with 100% filtration, and push in that dowel, it is a blind hole and there is no easy way to pull it back out.
2) From that point on, the front outlet MUST be connected to the rear inlet. (even if through a filter). There is no capping off the outside lines.
I am a full flow fan so i do it and don't look back, but that's why I directed you to the article so you can decide for yourself. Have fun with your new engine Matt!
BTW, if this is a 1964 engine, it could very well be a replacement block and there may be no numbers on that Flat area beside the Distributor at all. That's how mine is.
