Ah sock knitting, a subject near and dear to my heart.
Dave, how I wish I could see a picture of your machine! As I've been hand-knitting for a few years now I'm always interested in period knitting related "stuff"! Doug--just as you said, it's my understanding as well that period knitting machines required the heel to be entirely hand-knit (since the machine could only do tubes of knitting), and the toe to be decreased by hand as well (this is different than the toe opening just being closed by hand). I believe Karin talks about this in her excellent article in the Columbia Rifles Compendium.
As a side note, IMHO $65 for a pair of hand-knit socks like Karin's which employ period techniques, needle size, gauge, etc. is more than a fair price. Yep, it is a lot of cash, but with care those socks will last quite awhile. Like any well made, well documented garment you might buy, you might be paying a bit more but are likely getting a better quality product overall. Why should the poor, lowly sock be any exception?
Just my 2 cents,
Mary