The part you misunderstood was that that police officer couldn't have denied you entry into the country. He could have taken you to the police station for questioning, just like the police in any other country can if they think there's grounds for it.

Basically, you ran into a police patrol that happened to be near the border. It could've been a random check for illegal activity (drug trafficking, etc), or they might have been looking for something in particular.

It was not a border control, and the German borders aren't more open or closed just because their police is relatively eager to do patrols. As a counterpoint, I was once stopped by German police on the highway near Hannover - far, far away from any border, and asked the same questions you were asked.

I'm from the Netherlands, and I travel into Germany many times a year, by all kinds of means of transport. I've been stopped near the border (also on a train, much like your story actually) exactly once. You just had bad luck.

Finally, while the Schengen treaty has a lot to say about freedom of movement, there's no section about welcome hugs.