It's common for Pony Motor Bearings to wear out (but it will never affect the magneto), new bearings are still available from Caterpillar. Your Cylinder with no compression could be due to a valve stuck open.
The smaller, horizontal lever coming out of the bell housing is the Starter Pinion Engagement Lever. The larger vertical lever is the Pinion Clutch/Brake Lever. The other lever as you suspected IS a compression release.
The Pony motor is geared to the Starter Pinion. To start the Diesel you first start the pony and idle it down. Open the Compression Release and then pull the clutch/brake lever to the rear to stop the pinion (and keep it from grinding) and then pull up on the pinion lever to engage the pinion with the diesel's flywheel ring gear. Once the pinion is engaged, push the pony idle knob in, rev up the pony and then push the clutch/brake lever forward to crank the diesel. When the oil pressure builds up you can close the compression release. After cranking the diesel for a minute or two you should be able to feel some heat on the diesel head, then you can open the throttle and the diesel should start to fire. Once the diesel fires the starter pinion will disengage (hopefully). If the diesel fires and quits, go back and engage the pinion as before and crank the diesel some more with the throttle closed. It may take several attempts with the pony motor to get the diesel engine started but you'll soon get the hang of it.
Good luck with your new toy!
Last edited by zootownjeepguy; 10-23-2011 at 07:31 AM.
'46 Willys CJ2A Farm Jeep, '39 Buick sedan, '49 International KB-7, '37 Allis Chalmers WC, Cushman Scooter(s)
Antique garden tractors & outboard motors
Other rusty old junk comes & goes without warning.
The 2 most useful tools to have in your shop are a Crystal Ball and a Magic Wand