I just uploaded some code that someone posted for me that output a 1MHz clock to Digital pin 13 which he told me to connect to XTAL1 on the atmega, and now it works! Does this mean my chip was setup to use an external clock...
(though I thought fresh chips are setup to use their own 1MHz clock)?
They are. Which means you or someone between you and the factory altered the fuses.
Can I set it to use its own clock?
Yes. With no tuning, the internal oscillator is ±10% of the frequency. With tuning you can expect ±1% (which is more than good enough for most applications).