Spindle Binding When Trying To Bring Tolerance Into Spec.

I'd stick with the old shaft: it doesn't look that bad to me. I'd clean it up just enough to make sure it has no protruding lumps or sharp edges and is round. I'd do likewise with the headstock holes.

How much oil does it leak? You might be able to reduce the leak rate by fabricating seals to back up new felts. Those machines were designed to leak some oil: it's called a "total loss lubrication system". Don't try to stop it completely.
 
You mentioned in one of your post that the South Bend lathe 9C 1940 model was a top oiler. Anything built after 1939, the headstock was designed to be a recirculate oil system. You fed it oil from a oil cup located on the sides of the headstock just under the journal bearings. Never heard of a bent spindle on a 9" lathe before. Last thing to ask, did you try to install the spindle without the bull gear and pulley, but with the thrust bearing installed, to check the fit with the bearing journals? You could get the bull gear cocked on the spindle and it run like a bent spindle syndrome. Ken
 
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