Slab Rust !!!!!.............. After about one minute, however, a bunch of RUST came out of the exhaust, and then water stopped coming out.
Blockage in the exhaust or somewhere in the cooling system?
Very common on marine exhaust manifolds, especially on engines that are drained of cooling water when seasonally or long term stored on the hard.
What happens is that as the cast iron rusts it penetrates deeper into the casting exposing the 'stratifications' of the casting when it was made. Such flakes can easily block the outlet of the manifold causing overheat problems that mysterious go away when the engine is shut down (and the slabs fall back to the bottom of the insides of the casting).
Rx. - Remove the exhaust manifold, and get inside the manifold with a stiff wire and break loose the loose 'slabs'. DO NOT use any non-inhibited acid to clean out this manifold EVER again - only inhibited boiler descaling compounds such as RydLyme, etc. if there is significant 'fouling'.
Once you shake and blow out all the loose and broken up slabs from the inside of the manifold, perform a 'pressure hold' test on the manifold to validate that the manifold does not have a pin hole leak between the gas side and the water side of the manifold. Put a temporary 'cap' on one of the water 'nozzles' on the manifold to totally block flow, apply a pressure gage to the water hose that you will apply and connect to the 'other' nozzle and apply 30-40 psi pressure, shut off the valve to the hose and watch the pressure on the gage to 'hold steady' for 15-30 minutes .... and with NO water coming out of any of the gas passages.
To prevent slab rust, always use an antifreeze with 'rust inhibitors' when laying up the engine for long periods of time; AND, whenever possible always run the engine for long periods of time (such will form a 'protective' BLACK form of rust ... in the engine and in the manifold).
These manifolds are no longer easily or commonly available, so take care of what you have: run the hell out of the engine and always add antifreeze with rust inhibitors when long term storing the engine.
BTW the carburetors on such engines have whats known as an emulsion tube that meters the correct ratio of fuel/air. The emulsion tube are small brass tubes with a closed end and with quite a few holes in the sides of the tube. If you get 'any' dirt or debris in any one of those small 'side holes' in the emulsion tube the entire fuel/air mixture will radically change. ALWAYS inspect and clean the emulsion tube when suspecting air/fuel ratio problems - the main jet only controls fuel flow TO the emulsion tube. (You can convert these 'fixed' jet carbs to adjustable needle valve control to extend the time needed for routine emulsion tube 'maintenance and cleaning'). Best is to keep small 'dirt' out the carb in the first place by applying a precise 10µM 'filter' between the fuel pump and the carb ... even if you already have Racors, etc. in the fuel delivery system.
hope this helps