as stated earlier the make of tractor would help and which pump is supplying your loader i.e. pump for tractor remotes, lift pump with a diverter valve, external pto pump ect. the info above will help determine if you have an open center system , I could be wrong but from information you given someone has used a close center valve on an open center system, as you said it will load the engine and cause the pump relief valve to open creating excessive heat. I'm not saying you don't have a closed center system just it is unlikely unless someone went to the trouble of installing one on an older tractor. Don't take what I'm saying as 100% correct as I haven't seen your entire system but I'm going to give a little food for thought, if your pump is open center and your engine is loading indicating the pump is creating resistance and the line with the gauge teed in it is from the pump and it is only holding 1000 psi then the bypass as you referred to it is a relief that is dumping fluid back into the return hose holding the pressure at 1000 psi, or somewhere in the system there is another relief valve doing the same or your pump is worn or not capable of producing any more than that. Without a relief valve in the system you can dead head the pump in a open center system damaging the pump or pump drive, a worn out pump might let the system work for a while but even a low pressure one would be damaged by dead heading it. On and open center system when in neutral the gauge you have show should read 0 psi or there about depending on downstream restrictions . Some valves can be converted from open to close by removing a special converter plug. I'm pretty sure you have a close center valve, one easy way to check is remove the in and out hoses with the valves in neutral try blowing low pressure compressed air into the in port if its open center then it will come out the out port, if closed center then it won't either way be careful as the remaining oil and compressed air can injure you.
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