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You are correct with my typo, "battery to discharge into the battery", "battery discharge into the generator" is correct. I have been replying on my iPhone but too many typos forced me to use my desktop with a real keyboard, maybe less typos!
I don’t know a good internet source for the information presented below. Typical with the internet there is a lot of misinformation and people’s “best guess” at how stuff works. My knowledge on this subject comes from vintage manuals for cars and motorcycles when the technology was first introduced. That information coupled with my background as an EE (Electronic Engineer) helped me to understand it.
A simple NO (normally open) relay typically closes at 80% of the designed voltage and opens at 20%. For simplicity assume a 10V system. The relay would close when the generator gets to 8V. If the battery is at 10V then the battery would immediately discharge into the generator since the generator is at a lower voltage.
Even if you designed the upper end of the NO relay to close at 10V you still have the 20% end to deal with before the NO relay would open. That means once the contacts close connecting the generator and battery the contacts are not going to open until both the generator and battery are at 2V. As you can deduce this is not going to work to keep a battery charged.
The cutout has two separate windings, let’s call them a voltage winding and current winding. The voltage winding goes from the generator output to ground. Its function is to close the contacts when the generator voltage reaches the designed voltage. The second winding, the current winding, carries the current from the generator to the contacts and when the contacts are closed, to the battery.
Here is how it works assuming a 10V system and the battery is at 9V. When the generator output gets to 10V the voltage winding will cause the contacts to close. Let’s assume this polarizes the cutout core as magnetic North. The magnetic field overcomes the spring pressure holding the contacts open and the contacts will close.
When the contacts close current will flow thru the current winding to the battery since the generator output is higher than the battery. The current winding also magnetically polarizes the cutout core as North reinforcing the closing of the contacts.
At this point the voltage does not matter as long as current is flowing thru the current coil from the generator to the battery and the contacts will stay closed. Even if the load of a low battery pulls the generator down to 5V the current flowing thru the current winding will maintain a magnetic field and keep the contacts closed.
When the generator voltage gets lower than the battery the current will reverse directions in the current coil and flow from the battery to the generator. A reversal of current thru the current winding also changes the magnetic polarity of the current coil to South. At some magic point the South magnetic polarity thru the current winding will equal the North polarity of the voltage coil. When this occurs the magnetic forces cancel each other and the spring will pull the contacts open disconnecting the generator and battery.
When the battery is disconnected from the generator the current flowing thru current winding stops. With the load of the battery removed the generator output may increase back to 10V causing the contacts to close. If this happens the above cycle will be repeated, i.e. keeping the contacts closed if current flows from the generator to the battery or opening the contacts if current flows from the battery to the generator. This will repeat many cycles per second until the generator output gets below the set voltage of the voltage coil and the contacts will no longer close. This of course causes arcing and pitting of the contact points and they need periodic cleaning.
Hence the simplicity and complexity of the cutout to act as a mechanical diode!