Yes, it's by design. You were supposed to be smart enough not to do this. The justification was that no one would put money into a machine that already had credits on it. The technical reason for this is that it's less expensive to have a circuit that always takes off a credit on game start.
That said, it's interesting to note that Gottlieb changed the behavior of the start circuit on their EM games several times over the years.
Some machines, when you inserted a coin for multiple credits, would simply put that many credits on the replay unit.
Some machines, when you inserted a coin for multiple credits, would actually start a new game, and also add one less than the total credits purchased onto the replay unit.
And, some machines did have a safety switch that prevented the loss of a credit when a "direct start" coin was used to start a new game. This safety feature is usually found on multi-player games, rather than on single-player games. That's because multi-player games often had a "credit button" relay which made it cost-effective to only take off credits when the credit button was used. So GTB knew this was the better behavior, and implemented it when it was easy to do so.
In any event, you do need to look at the schematic of each individual game to see what start circuit behavior you are dealing with. But it's usually a pretty safe bet that if you're on a single-player Gottlieb EM, it's going to take a credit off for each game start, regardless of how that game start is initiated.
- TimMe