Help needed - basic home reno info

[twobone]

I live in an 80 year old house.

The previous owners built a storage room in the basement under the bricked in front porch.

I've noticed sand, crumbling drywall and now mold at the bottom edge of the exterior wall in that room.

I pulled away the rotting drywall to discover that they simply laid drywall overtop of the bare slab-stone, dirt and mortar foundation without any insulation or vapor barrier.

So please confirm my next steps?:

Rip out the old drywall

Staple plastic vapout barrier between the studs

Lay fresh drywall

If I want to add some insulation, do I place that between the stone and brick foundation and the vapour barrier?

Or am I better to just leave the space between the stone wall and the vapour barrier open to allow it to "breath"?

The foundation in this area is very pourous and loose. I have not located any direct water and the drainage in the area outside is OK.

Any feedback would be appreciated