Regarding "everything had to fit in RAM": prior to real virtual memory, the Macintosh Resource Manager was capable of loading and unloading resources on the fly. Resources marked purgeable could be discarded when memory was needed. Code segments (another type of resource) could be loaded by automatically by the Segment Manager, but as you said would not unload until the application requested it or exited. INITs (system extensions) unloaded all code after initialisation by default (requiring extra steps to keep anything in RAM).
Virtual memory was built-in by System 7 (and I think available on supported hardware via 3rd party utilities earlier?).
Due to lack of protected memory, a few programs, especially on the earliest machines, with the least memory, 'abused' the display buffer by using it as RAM. Of course, this corrupted the screen, but it would all just be drawn again as soon as the program yielded time to the OS. Back then, only one user program could be running at a time, and it mostly had the screen to itself, so why not use it to copy floppies with less disc swapping?