tperryh wrote: …The repair worked and it is fine. Can you tell me how to run a repair function on the file.
To repair a Photos Library, close Photos and re-launch by option-command-clicking the Photos app icon. This does not operate on a file-- it repairs the Library with its database.
For #2 above, if I make the library I am trying to import the System Library, will I lose the album and folder designations from the original System Library in favor of those designations on the external drive?
I don't know what that means. The new Library will have the same organization as the iCloud Photos Library. iCloud makes all the connected Photos Libraries exactly the same as iCloud Photos. iCloud Photos is all about synchronization. (Of course, some devices don't see all the features of Photos-- iOS doesn't see keywords, TvOS doesn't have editing.) If you connect an new Library to iCloud, no pictures or albums are deleted-- the Libraries are merged.
Also, will I need to move this System Library back to the Mac drive? The problem here is the Mac drive has only 256 GB capacity.
You should use the external drive for the System Library. The Photos Library works fine from an external drive. A 256 GB hard drive on your Mac is just enough to hold the Operating System and a few often used files. You need a fast APFS formatted SSD for most of your stuff, including Photos and music.
I've set the System Library on the Mac to optimize storage which shrinks it to 15 GB on the Mac while in iCloud the library is 389 GB. The library on my external drive is 254 GB.
The 16K pictures in my connected "Favorites" Library takes 120GB at iCloud and 150 GB on my Mac. I've been editing a lot lately, so the extra is probably in temporary preview images. Using Optimize Storage make is impossible to backup your pictures.
Is the trick then to optimize the storage of the Library on the external drive after designating it as the System Library and then copy it back to the Mac drive?
Optimize works by keeping only screen-sized images local and depending on iCloud for the full sized versions. When you edit or print a picture, the full sized version must be retrieved from iCloud. When you back up an Optimized Library, you only back up the smaller versions-- it's not a true backup. You should be keeping one version on some device, usually the main Mac, that is not optimizing, but rather it downloads and keeps the Originals:

Then you use another hard drive to run Time Machine (or an equivalent) to keep incremental backups of the Library.
See this:
Make a New System Library connected to iCloud