Yup, just what he said - this is actually a fail-safe mechanism, so to speak, and it ensures that in case your HVAC controls fail entirely you will have full defrost which will allow you to drive home safely, albeit a bit toasty in the face and possibly a bit frost-bitten at the feet.
Also, what shuts the airflow when you turn the knob to "off" is a vacuum servo on the recirculating door in the engine bay right behind the blower fan, the fact that also is not functioning like you want it to really suggest to me that Franklin2 is correct and you have lost all vacuum supply to your HVAC system. The line that feeds it is actually very tiny, like 1/8" or so, it comes from the vacuum tree on the firewall above the engine and disappears in the fat harness near the evaporator core.
By the way your temperature control works just fine because its blend door is cable-controlled (there's a little rack and pinion assembly on the other end of the shaft with the control knob), and A/C works fine because it is all-electric. Basically your blend door is mechanically controlled, the A/C system is electric, and the vent doors under the dash are vacuum-controlled. Which is nice, cause many '80s and early-'90s Ford cars had vacuum-controlled blend doors too, and when the device that controlled those went stupid you'd only get half the heat you normally would, which was a major PITA on a cold winter morning - I used to pull the vacuum line off the blend door servo in one of my old cars thus defaulting it to full heat, redneck fix but it worked great every time, then when it got up to like 90F inside I'd plug the hose back on and let it all even out in the low 70s, lol
