Your questions, gymkhana, in reverse order:

1. Lastly, if Latin was not a spoken language, in what language did the people who wrote in Latin speak? And why on Earth did they write in Latin?

Classical Latin is generally considered to be the language spoken in Rome and environs between around 200 B.C. to 200 A.D. (roughly from Plautus & Ennius to Marcus Aurelius, with Cicero as the high point). There are some inscriptions in Archaic Latin from before this period, showing a slightly different form of the language.

Even before the fall of the Roman Empire to the Goths in 476 A.D., the spoken Latin, or Vulgar Latin (so-called not because it was obscene, but rather because it was the language of the people, the vulgus 'crowd'), had diverged quite a bit from the classical and written forms, especially in the widely separated provinces. The dialects of Latin that diverged from one another in Gaul, Iberia, Lusitania, Thrace, Italy, and other Roman provinces eventually developed into what are now called the Romance languages: French, Spanish, Portuguese, Rumanian, Italian, and other daughter-languages. So you could even say that Latin is not yet technically a dead language, because its dialects still have new native speakers.

Latin continued to be spoken as a second language and lingua franca throughout the former Roman Empire, and was also used for writing. It's interesting to examine the different varieties of Medieval Latin used by monks in different countries, since their spelling errors often reveal their native language.

2. am I correctly recalling that Latin did not make use of punctuation? Or even spaces, at least at one point?

Latin punctuation, at least in the Classical period, was different from the conventions that are familiar to us, which were developed in medieval times. Usually, inscriptions would separate the words with a dot about halfway up from the baseline, if the words were separated at all. Sometimes a colon : would mark the end of a sentence or clause.

3. In that case, how *did* one signify a question? and I noticed you transposed 'Est melior' to read 'Melior est' (a la 'Dolce et decorum est'). Is that because the way it stood would make it a question rather than a statement? the same way switching the "is" and the "that" in the preceding statement would have done the reverse?

Latin, unlike English, had rather free word order, so that for example: Agricola puellam amat basically means the same thing as Puellam agricola amat or Amat agricola puellam and so on -- 'the farmer loves the girl.' The Romans could get away with scrambling their sentences like this because of the inflectional endings: nominative case here in -a indicates the subject agricola 'farmer', while the accusative case in -am indicates the object puellam 'girl'.

Old English, and in fact all old Indo-European languages, had heavy inflections for case and number, enabling similar flexibility of word order, especially in poetry. But modern English no longer permits such free word order (except under 'poetic license'), and the order of words in The farmer loves the girl now means something different from the word order in The girl loves the farmer.

But just because Latin had rather free word order doesn't mean there was no basic word order. All else being equal, the normal word order for a main clause in Latin was SUBJECT OBJECT VERB . This is also the basic word order reconstructed for Proto-Indo-European, since it is the one found also in the earliest Sanskrit, Greek, and Hittite sentences, and also in relic environments like Germanic subordinate clauses. The order could be varied, however, for emphasis of certain words, or to distinguish new information from old information. Melior est would then be a more basic, or unmarked, word order than Est melior, though the latter would still not be a question.

In order to ask a question, there were special interrogative words, which would usually begin a direct question. For a wh-question, expecting a substantive answer, you could use interrogative pronouns or adverbs like : quis 'who?', quid 'what?', quando 'when?', and so on. For a yes/no question, the usual trick was to add the particle -ne after the first word:

Potesne hoc intelligere? 'Can you understand this?'

You could also use Nonne if the answer Yes is expected:

Nonne hoc intellegis? 'You understand this, don't you?'

And Num introduces questions that expect the answer No:

Num hoc intellegis? 'You don't understand this, do you?'

Hope this helps.