[dagskarlsen]

I have to guess a little, but since it obviously works, I'm quite sure:
Line (A-wire) coming in on Yellow, connected to ringer, and Receiver.
The other end of the receiver is connected to the hook switch.
Line (B-wire) is the black, this goes thru the dial and the transmitter to the hook switch. When you go offhook this forms a primitive but working telephone circuit.

The Red wire has to be the ring-signal wire, and should not have been connected to the candlestick, when going off hook the receiver will be connected in parallel with all the ringers in the house. When dialling the receiver and the ringers will be shorted by one contact set in the dial, another set shorts the transmitter. To reduce the click in the receiver this set should close first, and open last. Due to the capacitor in the master socket, the opening of this contact will generate a click in the receiver.

By disconnecting the red wire from the candlestick this should be much better.
Putting in an induction coil, and capacitor makes the telephone much better.

The simplest sidetone circuit here will be a capacitor in series with the receiver, (The one in the ringer box in series with the green wire to the candle stick. A coil with high AC resistance and relatively small DC resistance across the receiver and capacitor. (This coil could be e.g. a relay.)

More complex with an induction coil (transformer), the only limitation is the need of sending the full current thru the dial and thereby the transmitter.

I will try to make a diagram or two.

dsk