To clarify a little further, the vacuum can on the OE distributor can
either retard the timing or advance it.  In a non-smogged engine, you'd
only want to add vacuum advance to your base timing, so the vacuum
source would be connected straight to the can.  But for emissions
control the engineers wanted to retard the base timing on a cold
engine, then switch over to normal vacuum advance at operating
temperatures.   So they used this switch you're talking about, which is
shaped like a 3-legged "F."  One leg connects to a vacuum source.  One
connects to the retard side of the vacuum can, and the third one
connects to the advance side.  Inside the "F" is an air valve, which
selects which side of the can will be exposed to vacuum.  With a cold
engine, the retard side is selected.  When the engine warms up, the
valve moves to close the retard side and open the connnection to the
advance side.

What you observed on your engine, I'm guessing, is that a previous
owner wanted to disconnect the vacuum can entirely, but felt uneasy to
leave the two connectors open.  So he/she connected them with the loop
that you observed.  Somewhere along the line the hose to the vacuum
source came loose, so that explains the hose not connected to anything.
Or it could be some other variation on this theme.  The thing is, to
disable all that needed to be done was to disconnect the vacuum source
and plug it with one of those little neoprene caps.  As it stands now,
it sounds like you've got a vacuum leak, which will allow unfiltered
air into the engine, and will also lean out the mixture, potentially
causing rough running, pre-ignition, and damage to the pistons.

So I would definitely look around for a vacuum source not connected to
anything and connect it to the advance side of the vacuum can.

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