I have been going crazy doing research on how best to address insulating and "air-proofing" an old 1040's era farmhouse I have purchased in Dallas, which would be categorized as a "mixed-humid" climate.

I will do my best to describe the situation I have but am not sure of the proper terminology in some cases. Sorry it is so long, I hope someone will take the time to read it.

The external siding on the house is what I call old lap siding where the boards overlap each other slightly going down the wall.
Inside there was old paneling nailed up, underneath that was some kind of paper mesh backed membrane. Under that are old 1X6 pine boards nailed up to the studs. Under that is nothing, an empty cavity where you can see daylight through gaps in the lap siding outside. I want to make the house more energy efficient, but do so in a way that I don't have to worry about the wall cavity getting wet and moldy. After much research and speaking to some people, I have come to the conclusion that a vapor barrier is not a good idea (at least in my area). However, it seems to me that a air-barrier (like tyvec wrap or something) that is vapor permeable may be a good idea. I am trying to figure out the best way to incorporate an air barrier and insulation. The problem with the air barrier is that traditionally that is done on the outside perimeter of the house. In this case, I do not plan on removing the siding, so that would mean installing an air barrier from the inside against the interior side of the exterior lap siding and in between the studs. To me this doesn't sound like a good idea. There is an air barrier by Certainteed that goes over the interior wall, stapled across the studs with unwrapped roll insulation underneath. Not sure if this makes sense as I am afraid there would be nothing (no air or vapor barrier) between the exterior siding and the insulation in the wall cavity. I am afraid it will get wet. After I determine how to incorporate an air-barrier (if I should), I want to put insulation in the wall cavity. Not sure what I should use. I do not have the budget to do spray in foam, I will have to stay with the old-style batt insulation. Finally, once I add the air barrier and insulation, should I simply install drywall over the studs on the interior, or should I put the 1X6 boards back up and install the drywall over the top of that? If the suggestion is to place an air barrier directly underneath the exterior siding, do I need to implement some kind of shim to leave a gap between? I am really stuck on how to proceed. Please let me know if any of you have advice. Thank you. Brad Fisher