Ahhh.
None of the visible wiring looks original. Thus, you can't assume that red means anything beyond what was at hand when someone did the wiring.
"connects to the engine block right side" - not surer what you mean - connects to the block like directly to the metal, or like it goes through an opening and disappears inside, or something else?
The absolutely most likely situation here is a reversed battery connection. Not so bad: there is so little "electric system" on these bikes that replacing what's ruined won't break the bank. You are far from the first to do this: some bikes (not sure about yours) came with batteries where "+" was on the left with it in the correct looking way... but one can only get batteries with "+" on the right nowadays: that makes it rather tempting to connect it "the way the old one was" despite the cable colors saying "No!! Stop!! Think of the Children!"
The "-" battery cable (black insulation or bare metal wire if someone sane is doing the wiring... green would be OK in a pinch) must go directly and only to the frame and engine cases: usually to a big ring terminal under an engine mounting bolt's head.
The "+" battery cable, traditionally a red insulated wire (and not the place to demonstrate a rebellion against staid outdated traditions) goes to 3 things usually
- the starter motor solenoid relay
- the rectifier positive connection
- the fuse(s).
Have a look at where your battery wires lead to.
If you had the battery connection correct then clearly something is badly wrong. Check the wiring against a shop manual diagram, although the rewiring won't match what was there from the crate.
The obsolete germanium rectifier should be checked, I routinely replace those with a more modern silicon bridge when working on these old bikes.
If it was reversed, only the rectifier would definitely be destroyed. Some wires might be damaged, even melted and shorting together. You will have to carefully check the wiring.
Quite possibly someone had some sort of disaster with the bike and attempted to repair damaged wiring. The picture shows that he/she should not be doing such work. Maybe the problems proved too much for him/her and the project was abandoned until you came along. So don't assume it ever worked with the wiring you see there.
It's odd that you had to turn on the key before it started going weird though, a reversed battery usually gets things smoking instantly upon connection.
I don't have a wiring diagram but that era was consistent, nothing in there that should draw enough current to heat up the battery cables... but your improvised battery cables are MUCH smaller than the factory ones.
