Possible ceiling fan failure
I believe the fan was probably damaged and that was the reason it was disconnected the forward switch position may have fried or the wire to the motor, in the reverse position the wiring was good but the motor was bad so once you energised the circuit what little magic smoke that was left in the motor escaped , time for a new fan your wiring is probably fine as fans are low draw motors a quick inspection will tell if still usable they probably are but since you will be updating the wires it really won't matter. You should not connect the neutral and ground together this can be dangerous until the new 3 wire upgrade is done don't connect the ground wire to the circuit. Or as new code allows pull a ground from another location from the same panel. If the box is metal connect the fan ground to the box many older homes the metal boxes were grounded on the back side.