I was driving myself mad; xterm was released in 1984 and it didn't really matter there was no XDM because there because you merely needed a window manager to tile your xterm windows...

But sure, the definition of "X terminal" here is meant to mean dedicated hardware that runs an X server connecting to a remote X11 display manager, and nothing else. Those were always somewhat niche, in the same way that once terminal emulators existed, general purpose PCs displaced hardware terminals.

In the 1990s, my university used inexpensive diskless X86 PCs running X386 (predecessor of XFree86) with just a ramdisk, booted by DHCP / BOOTP / TFTP.

I feel like I aged a decade reading that. You're not wrong but it's an interpretation that didn't even cross my mind. :-(