Hi Hair Jig.
Your setup is completely the opposite of the way the steering tube and parts were installed on my boat and yours looks somewhat like the OMC diagram. Mine was not set up this way at all so I suspect this is why I had problems. This was done before I purchased the boat.
I am going to get 2 new adjustment nuts tomorrow and I am going to install the steering tube and adjustment nuts/washers as you have in your installation. This looks like the right way to do it.

Thanks very much for the pic .
Sterling