Rear Diagonal(s) to Rear Frame Channel

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My question is: what was between the diagonals and the rear frame channel that would rust? Does it need to be replaced?

The rolled layers of the steel were de-laminating (not a technical term). Been there. The parts are indeed a bit thinner. Your call regarding frame replacement. Check to see if you have the same symptoms elsewhere such as inside rails or between frame and spring hangers.

As to the rivets which were removed, what is the best replacement option (besides rivets of course)?

I'd suggest grade 8 bolts, nuts, etc. with the biggest diameter washers you can find to spread the load and compensate for the now thinner parts. Fine thread will give you a wider shank and more accurate clamping torque. Coarse thread bolts may have greater thread strength but I don't know that for certain.

If you're staying metric go with 10.6 hardware.

Supposedly grade 5 and metric 8.8 stuff is a little softer... or a little less brittle. Some folks prefer a little "give" when it comes to frames due to their tendency to flex even when negotiating small obstacles (rocks, curbs, Hondas, etc).
 
Rust doesn't have any structural integrity so my thought would be to chip it out of there. Get rid of anything that you can with hand tools such as a hammer and an old screw driver. Then drive the vehicle around a bit to see if things squeeze back together at all. This would tell you if holes in the hangers or frame have wallowed which is doubtful. Then blast, prep, muriatic acid, whatever, and then POR15. Maybe the thick version that's like putty and comes in a tube to fill in any gaps or spaces?

Rear frame channels are fairly easy to fabricate or have fabricated and you may still be able to purchase new rear spring hangers so you could rebuild if you wanted to. I doubt you have anything to worry about. Guys sink tens of thousands into '70's era muscle cars that are just about as rusty.... and then drive 'em real fast.
 

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