Dick,
White smoke in the exhaust is usually a sign of unburned fuel or excess fuel. Sometimes it is the result of water in the fuel. Typically white smoke from a diesel engine occurs when they are cold. Sometimes it is failed glow plugs or low compression. Engines that have been shot with ether starting fluid will smoke white at first but then clean up as they warm up, unless the ring lands are blown out, then it will go to blue smoke..... Carbon will burn of as a combination of blue/black and then clean up after about 15 to 20 minutes at full load. If you have not already done it, check to see if there is a fuel water separator that needs to be drained off. That will resolve the water in fuel side for the short term.
In your case I would do two checks, the first being a pressure test of the cooling system both hot and cold. If the cooling system holds pressure of 10 psi for 10 minutes both hot and cold you can rule out a head gasket issue. NAPA sells a great tester for about 50 bucks. Kind of expensive but good to have since you can test the cooling system during annual maintenance to see if there are leaks, then loan it out in exchange for beers!
Second test would be for compression. You will need a diesel compression gauge and the proper adapters for your engine. Perform a dry cylinder test. Then a "wet" test which involves squirting a small amount of oil into each cylinder and then testing again. Check your manual to see if the compression check is in spec. Due to cost of the compression tester you may want to ask around. Find a diesel tech that will do it on the side for some brews if you are lucky. Most shops will get you 2 to 3 hours labor for this test if you hire a mechanic.
Here are the three colors of diesel exhaust and what they generally mean:
White smoke: Excessive unburned fuel. Common at start up when engine is cold,often made worse by chronic use of ether. Can also be caused by water or gasoline in fuel. Can also be mistaken for steam that is result of failed heat exchanger or riser, rare but I have seen it.
Blue smoke: Usually a result of worn piston rings. Can also be caused by leaking valve stem seals which is fairly common. Excessive lube oil consumption is also typically happening at the same time.
Black smoke: Caused by over fueling from the injection system. Sometimes a sign of engine overloading so back off the throttle and see if the exhaust cleans up. Faulty injectors are a common cause for this too. However, it can also be caused by a clogged air filter! So, if you get black smoke, pull the air filter off and run it before you call a tech to test the fuel injectors.....
Hope this helps out a bit!
Chris
E34 Flight Risk