1966 Soft brake pedal is this normal?

Any change in Pedal feel indicates an issue in the brake system. Brakes on early mustangs have firm pedals by todays comaprison. However i you added disks and power booster you might feel a bit more softer than any manual system.
First you should inspect each brake drum/disk location for any signs of leaks. if the fuild is lower in the master cylynder than you left it before parking, its got a leak. this also can let air inside which compresses and give a soft pedal. It would be a good idea to bleed the brake system fully just in case.

Another culprit can be the flexible brake lines. They should be replaced if more than 10 years old. they often look good on the outside but can swell or even fail under pressure.

Um, yeah, the front brake is low, and the rear is dry. Should be 1/8" from the top.

You Asked:

"does that mean the smaller one on the left is for rear and the bigger one on the right is for the front?"

The answer:

YES!