I'm assuming this car doesn't have the infamous ALDA, but the vacuum line runs directly from the governor to the throttle body. Sometimes the "big picture" helps. Sorry about the terrible scan job. Remember that pushing the rack in (to front of car) increases the rate of fuel delivery, and that the spring and diaphragm are fighting for control. The spring/diaphragm assembly is the governor. Governors work on speed and load, and the mixing box/venturi control unit/throttle body downstream of the air cleaner decides which is more important. Your foot throttle moves the butterfly valve. The amount of vacuum created depends on the butterfly valve position and the speed of the air going through the air duct. High air speed and low load means the engine doesn't need much fuel. Another way to think of it is more vacuum created and the diaphragm wins the battle. At the other end of the spectrum is low engine speed and high load, which means low vacuum and the spring wins the battle and enriches the mixture. That's the theory.

There could be several reasons for the smoking:
1. Leaking diaphragm. I was surprised to see that my parts book indicated no gasket, so I'm now not entirely sure if the governor should be leak free, although my instinct tells me it should be. The acid test is power, smoking, and fuel mileage on the coast, providing the car lived its previous life at low altitude. Engine oil consumption may also be masking the issue.
2. Either a leaking or partially plugged vacuum line or fittings which may be inhibiting the maximum vacuum the governor sees and/or the governor's response speed.
3. Lugging the engine. I don't know if the car spends all of its time east of the Cascades or if you go back and forth. If back and forth and you're lugging on the big hills then it will take a bit of time for the carbon to be burned out.
4. Engine is not set up for high altitudes. This means those shims. Here you have to decide, based on where you drive. If it's all east of the Cascades then play with the shims so that the spring loses. It's a tough call if you go back and forth as a lean mixture at low altitude may result in a burnt piston.

My opinion: change the diaphragm as long as you have it apart. Doesn't make sense to me that it wouldn't hold vacuum, although I may be wrong here. Make sure you tighten the four mounting bolts in a decent pattern (think cylinder head). Then make sure you have no other leaks or obstructions in the line or fittings. Then try it. Remember you change the idle mixture at the throttle body, the running mixture with those shims. If it still smokes then decide whether or not to play with the shims. Just make sure you get the diphragm mounted to the rack properly. If that falls apart then the engine will run away.

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daBenz - 1970 220D