Well, there's your first problem. 16MB of RAM is barely enough to run 7.6 and any apps, let alone 8.1. Do you have Virtual Memory switched on? That will slow you down a lot, and the less real RAM you have the worse it is. Do you know how VM works?
I would suggest downgrading to 7.6.1, or trimming the amount of RAM 8.1 uses as follows: Get hold of a copy of InformINIT (OS 8 version or newer) and start ruthlessly slashing your system startup items, using either the Extensions Manager or (better) a copy of Symbionts or Conflict Catcher. Once you've done that, set VM to the lowest allowed in the control panel (8k or 32k IIRC) but leave it activated - this is supposed to improve memory management.
In short, you need either more physical RAM or an OS downgrade. You could also try the old Compact Flash/PCMCIA VM trick if you have trouble sourcing any larger RAM sticks for that model (which we all do these days) but that won't be as fast as real RAM.
You didn't mention the size or anything else about the HD. Putting in a newer, faster one will help, but your first issue here is really the RAM. And that the 1400 is just a slow architecture overall. The 166MHz CPU is the fastest module for these machines, unless you luck into one of the third party upgrades (180MHz 603 to 500MHz G3). Maybe you can get lucky and find a beater on eBay with more RAM which you can swap in, or stack if there's a slot available. Everything in the 1400-series machines bar the CPU module and the LCD is identical, so it's handy to have a spare.
