George, the pipe connects where the thermo time switch connects to the back of the head of the later model 280 engines and runs under the engine and back to the lower radiator hose (which is the suction side of the water pump). The thermo time switch then connects into a fitting on the bypass line.
It appears that when the 230 engine grew to the 280, there was just too much heat to remove (more HP equals more heat) and since the pistons got larger the coolant channels had to get smaller which also restricted coolant flow to the back of the head. More heat, less flow led to the overheating problem so MB came up with this bypass.
What happens is now the water pump suction is pulling coolant through the head increasing the amount of heat that the coolant can remove. The hot coolant then mixes with cold coolant from the lower end of the radiator. Not an intuitive fix since the hot fluid now bypasses the radiator, but at the end of the day it all winds up in the coolant mix which mostly (90% or so) goes back to the radiator to get cooled. (It works similar to the oil slip stream that gets filtered in an oil filter) I suspect that since a small portion of the coolant now bypasses the radiator, on really hot days (when the engine running above the thermostat temp), the engine does run a few degrees hotter, but the extra coolant flow to the back of the head levels out the temperature gradient that was caused by the dead spot in the back of the head overall removing a hot spot that generates the main problem. Before I did this I had a 15-20 degree gradient across the head, now it is gone, which in my mind is a good deal. (Sorry for the long explanation, but in my younger days I was a heat transfer engineer so this is fun stuff for me!)
