With that clear line connected, you're running oil right back into the oil pan, and putting little, or no oil into the passages to the crankshaft and elsewhere. Remove that line completely and plug the holes where it was attached. You have a "bypass" engine, since there are no big (1/2" NPT) ports that would identify a "full flow" engine. Even the later (1959-63) 261's would have probably been set up for bypass filtering unless the big dowel pin on the driver's side of the block was pushed in. If you choose to use a bypass oil filter (not necessary- - - -lots of engines had no filter at all) the restriction that controls oil flow through the filter element is built into the canister.
Jerry
