When I telnet to the Citadel port I get something like "200 mysystemname Citadel server ready." Why?

You're not supposed to telnet directly into Citadel like you do with an IRC server (and, in fact, with some older Citadel-like systems). That port is for the client to connect to the server. Run the client instead (the supplied client is called 'citadel' oddly enough). To set up a public-facing text client, allow telnet or ssh users to connect to a copy of the Citadel client running on your system.