Now, I've read a lot about the shuttles development over the years and never heard of anything like this. Either A) There was one lone idiot that came up with the idea and he was quickly shouted down, or B) This story is bullshit. Either way, I gotta ask, source?
It wasn't mentioned in the detailed book on the development of the Space Shuttle that I have, either, but was related by one of the project managers or Shuttle program directors in this:
That's MIT's graduate level course in aeronautical systems engineering from the year they devoted the entire course to the Space Shuttle. The video lectures are free online!
For a geek, it was more fun than watching sci-fi shows, and I highly recommend it. There's lots of personal anecdotes, as each week features a guest lecturer who led part of the design teams (structures, aerodynamics, propulsion, navigation, etc) about how they designed it, and what they did wrong, and what they'd do differently.
The "move the engines over" idea was indeed just brought up in an early brainstorming session and never got to the level of a paper sketch. How would you even sketch that without wadding up the paper and throwing it in the wastebasket?
Anyway, lots of speakers and stories, and lots of design insights. I can't recommend it highly enough. The audio levels at the start of the first lecture are a bit low, but that gets fixed pretty quickly, and the student's projects were to pick a system on the Shuttle and design a better alternative, or make a significant improvement.
Among the other tidbits I learned:
Aluminum versus titanium for the structure was a complete toss up. The weight comes out the same (titanium weighs more but uses thinner tiles). So the program director said he flew out to talk to Kelly Johnson at Lockheed, who'd designed the SR-71 out of titanium. Kelly told him "Do not use titanium if you can possibly avoid it. It's a machining nightmare." So the shuttle is aluminum.
The engine hydraulics and flight control surfaces, if redone, should be driven electrically from added fuel-cells instead of with the APU's, which is vastly simpler and more reliable.
The main landing gear should've used four-wheel bogies instead of two-wheel, but the realization came too late because they'd have had to redesign the wing's landing-gear bays, and redesigns cost a lot of time and money (especially when they were done by guys sitting at drafting tables).
And of course it discuses the whole Air Force cross-range fiasco, along with how they botched the operation cost-estimates and flight-rate so badly.