The original shuttle design was for a conventional lower stage launch vehicle (eventually this evolved to a manned lower stage as discussed below). The version that survived Congresses "suggestions" during the budget process is the one we have today. The committee that forced NASA to use the "more cost effective" option has the blood of the Challenger crew on its parsimonious hands.
Congress provided very little input into Shuttle design. Very, very little. By the time Nixon formally approved the Shuttle (ie., the first point Congress had any input at all on design specifics), the Phase A, B, B extension, B', and B'' studies had already converged on a vehicle very similar to the one we have now; delta-winged orbiter on an external tank with boosters. There were only two real questions left open, both in NASA's hands; solid versus liquid boosters, and parallel-staging (as with the Shuttle as-built) versus series-staging (as with most launch vehicles). Solid rockets were selected because they appeared to have very little development and use risk, based on the flight record of the Titan III, and were cheaper than liquid boosters, enough to allow for a cost margin for development of the risky tiles and SSMEs.
The real limitations on Shuttle design came from a combination of the limits of the state-of-the-art (a fully reusable design would have been very risky developmentally, while the partially reusable design selected was much less so) and budget limitations imposed by the OMB. If you want to point a finger at anyone for hurting the Shuttle program due to budgets, blame the OMB, not Congress.
The Saturn V itself (all three of the boosters) was only of real use as a lunar launch vehicle Any of the three stages however, especially the S-1C would have provided a significant heavy lift option to the U.S. since each of the F-1 engines (of the five total) produced around 20% more thrust that the total provided by the Shuttles three main engines. There was a serious plan to use a returnable (i.e. manned) version of the S-1C as the base for the Shuttle launch vehicle. The S-1C would have provided about 7.6 million pounds of thrust at lift off compared to the 5.6 million provided by the two SRB. When you consider that there was also a design in hand to upgrade the F-1 engine to F-1A that would have given the S-1C booster a total thrust of 10,000,000 pounds (or close to double that of the Shuttles pair of SRB) the potential for heavy lift to orbit become remarkably clear.
At least it was clear to everyone but Congress. Congress preferred to use the money to build bridges to nowhere in Alaska and to pay farmers not to grow crops and all the other "bringing home the bacon" programs that Congress manages to piss away money on instead of actually using it for something useful.
Do I detect a certain note of hostility here?
The real problem with the Saturn V was that it was both very expensive to build and launch and drastically oversized for any practical purpose. And I mean
drastically oversized; even the Skylab program did not require the full capacity of the Saturn V. Given that there was (and is) no particularly apparent practical use of such high lift capacity, while much smaller and far cheaper vehicles do yeomen's work launching satellites that provide billions of dollars of economic benefit, it is hardly surprising that the Saturn V was canceled in favor of a system which appeared to fill that more useful role.
A reusable S-IC is impractical, since it would require a major development effort on par with developing the Shuttle in the first place (a major reason the fully-reusable Phase B vehicles never got built), while an expendable S-IC booster (actually proposed by Boeing, for obvious reasons) would be very expensive and only usable once.
The potential that the Saturn V version 2.0 possessed for further space exploration and commercial exploitation of medium and high orbit makes the effective end of the U.S. manned program with the current Atlantis mission all the more poignant. The "might have been" is so great that it almost make one want to cry.
It's no more the effective end than ASTP was. Less, even, since at least American astronauts will continue to fly while the next system is being developed. Orion is still, for all intents and purposes, under development, if slowly.
In any case, without any clear economic or political benefit, that "further exploration" will not happen, period. China isn't going to do it--they barely fly taikonauts at all--India isn't going to do it, the Russians sure as hell aren't going to do it. Even less so in the 1970s, due to the economic conditions of that decade and the the fact that the US just won a big space spectacular.
It isn't clear to me what is meant by "booster" here.
You mean, the concept of the STS is still much the same, and there's a commitment to developing reusable, presumably hydrogen-burning, Main Engines installed in the reusable entry bodies, and the Saturn stages take the place of the OTL solid-fuel boosters developed by Morton-Thiokol?
It would help if I had pictures, but I'm almost certain the OP is proposing something like one of the North American Rockwell proposals for the Shuttle in Phase B''. It had the Orbiter hanging off of the ET sitting atop a modified S-IC stage, in a fairly conventional series-burn configuration. As with other series-burn vehicles (including solid booster, pump-fed liquid, and pressure-fed liquid designs), what would happen would be similar to conventional rocket launches.
EDIT:...Or, I could have just linked to the astronautix page like PMN1. What can I say, I have a big book about Shuttle (Jenkins'
Space Shuttle, if you're interested; I can't wait for the 2012 version to come out!) sitting right there, it seemed best to refer to it.
In the former case, it will still take the better part of a decade to develop the reusable main engines and thus there'd still be a major hiatus in all manned or heavy launches for the USA; insofar as we are "preserving" the Saturn-V tech by offering its contractors future purchases if they will keep the production lines open, we are offering pie in the sky--maybe guaranteed pie, perhaps even paid for in advance. But this also means locking in a commitment to technology that is a decade or more out of date by the time it starts getting routinely employed again!
Nah, the F-1(A) isn't out of date even today IRL. It's still one of the highest-thrust engines in history and has a decent ISP without a complicated closed-cycle design.
I'd think in that case, rather than simply use the existing S-1C right off the shelf, they use its capabilities as a design point and put out competitive-bid contracts that would be awarded based on cost versus the development of attractive innovations--a sort of "Son of Saturn" competition. (Call it the Zeus?

) That way they have a new rocket design for the late 1970s--several in fact if the losers for the Shuttle booster contract find interest as alternate heavy boosters for other NASA purposes or the DoD or foreign interests.
No, they didn't do that sort of thing yet. The whole point of using Saturn in the first place would be to minimize development risks anyways, no point in throwing in "innovations" (those were already looked at in Phase A and B, anyways). What they'd do would be to solicit designs and pick the best one--well, in all probability, the Boeing one, since Boeing built the S-IC in the first place.
The second case is more an alternate history, since we now know in retrospect that holding out for the more "advanced" STS did not result in an eventual era of cheap access to space after the initial hiatus as was hoped. Therefore if the advocates of a less innovative, "cruder" incremental approach prevail and the renewable-command-module atop a traditional stack of one-shot stages is adopted, perhaps pending the parallel development of a more STS type system, then yes, the old establishment of boosters gets another cycle of bidding and construction, and American launch capability grows and evolves and sets a high bar for any second-generation system comparable to OTL STS to meet and surpass, in reliable performance and frequency of launch.
No, it would have looked much the same, actually. Shuttle design requirements were not driven by technology, suffice it to say. There were a number of Buran-type and series-burn designs proposed (to say nothing of the early Phase A/B fully reusable designs). The main advocates of the smaller conventional-booster lifted designs (which would just have flown on a modified Titan III; something to make Martin Marietta a bit richer, but nothing groundbreaking) were at the OMB, not NASA. Both NASA and the Air Force wanted the big vehicle, NASA to lift space station modules and the Air Force to lift polar-orbiting recon satellites (well, that was really NRO, sort of).
My understanding is, the big constraint on NASA around the early '70s was mainly political. Having won the Race To The Moon, the mood in Congress and the White House was to wind down the whole space adventure, however carried out; offers of the advanced, hopefully more economical STS was an attempt to keep NASA and some contractor funding afloat in the face of this skeptical consensus. What you really need for a POD intended to keep NASA growing and an ongoing, steady expansion of US space launches would be a political change in mood, a reason for politicians to see a need for this expansion to be sustained. Then I presume they would want to keep gradually improving Saturn-like tech on the front burner for immediate needs and also fund looking to the next generation.
Nah, Nixon liked the space program. He liked the astronauts. He wanted them to stay around. Congress had some anti-space diehards, but they had been fairly comprehensively defeated in 1969/1970. Budget limitations were a matter of course, and that does mean fewer launches and a shrinking of NASA, but it doesn't mean Shuttle, necessarily. It did promise operational savings (which of course were not realized, but they didn't have time machines), but it would entail significant development cost and risk.
What they didn't want was grand new space adventures off to Mars or whatnot, entailing tens of billions of dollars of additional funding. That's why Saturn V was doomed--it had no other practical use--as was NERVA. Shuttle flourished because NASA pushed
hard for it and it was pretty explicitly not an off-to-Mars system.
But I don't see how fiddling around with alternate launcher strategies changes the mood, except in the measly way that hyping the advanced new STS concept did accomplish some of that OTL. The POD is going to come from outside the technical establishment, in world affairs and national interests, or we can expect a choking-off of US space capability as in OTL anyway.
Exactly.
As long as we are speculating on alternate launchers, I'd put out my interest in airbreathing lower stages. I never see any proposals for such a thing in any of the annals of American or Soviet launcher concepts, except in the sense that some notions like the Soviet Spiral do propose launching an orbiter from a supersonic airplane. Having done some crude math on the subject (last time I did this was years ago though) it seems to me that substituting jet engines like the one used in the SR-71 to take the system up to Mach 3, then switching over to rockets, works out at best to be about the same in all-up weight. It presumably would have a much higher initial cost, offset by the jet engines being reusable--they had better be! I have to presume that such an inherently attractive idea as postponing the need to carry oxidant, which in the case of the hydrogen-burning STS is by far most of the reaction mass, and for that matter getting more thrust per unit of energy generated because you are accelerating the mostly-nitrogen atmosphere, has been so neglected because if you look closely into it, the weight and cost of the jet engines is such that overall there is no net gain. Which seems a shame to me.
Really, you haven't? My god man, where have you been living!?

Not to be too flippant, but an enormous proportion of launcher proposals have involved airbreathing first stages or partially airbreathing SSTOs. Liquid air rockets, scramjets, air-augmented rockets, and a huge variety of other ways to exploit the atmosphere to get around pesky performance limits on rockets (especially the rocket equation) have been proposed since virtually the very first moment shuttle-type vehicles themselves have been. Just look at the
astronautix page on the subject!