Unless I'm missing something.... the starter in the pic appears to have a stud on the bottom that the wires are connected to. *IF* that is the case.... the starter is not the original.
If what happened is what I think happened the OP was kind of frugal.
Sounds like the solenoid on the starter had a failure on the plate that energizes the starter. The pull in function of the solenoid still worked. To solve the issue and not buy a whole new starter, he simply installed a cheap solenoid to actuate the starter motor, while the original engaged the bendix. *IF* that is the case, and the original solenoid is still present, then remove what the PO added, run the wires correctly and replace the original solenoid, or the whole stater assembly.
The way you describe the system to be wired cannot be correct, or nothing would work. I don't think you correctly following the wires. It's that or you aren't explaining it correctly, as it would NEVER have worked wired that way.
Post a better pic of the starter if you need me to confirm how things are wired.
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