I had pulled the starter before turning over by hand, so I bench tested.. The starter spins, but the gears resting position is where you see in the photo..and that can't be right.
Yes, it's normal. This isn't a solenoid-shift starter drive, it is a Bendix Folo-Thru starter drive. The drive pinion you see here rides on a helix. Inertia flings it forward up the helix when you activate the motor, and it latches into the forward position. It stays in that forward position until the engine starts and overdrives the pinion fast enough for its flyweights to fly outward by centrifugal force, unlocking the pinion from its forward position and driving the pinion back down the helix.
Maybe or maybe not; there is a lot of bad info on starters for the '60-'61 cars, which are not interchangeable with the '62-up starters. Easy to spend money and wind up with something that won't fit/work.
But I sort of wonder what the point is with the present activities; are you just sort of playing with this engine for fun? It's going to need a full teardown, cleanup, and rebuild.