The cold hard truth is that you purchased an unwarranted product... a 30 year old unwarranted product... and S&W is offering to fix it for a reasonable fee. I think they are being fair.
"Unfired" or not, a HELL of a lot can happen to a gun in 30 years, and S&W has no way to verify your story.
Seeing as the equivalent new production gun can be had for a reasonable fee, I assume that you purchased a 30 year old gun out of some sense of nostalgia... Your case illustrates the FACT that the S&W "of your grandfather" was NOT at all infallible. The S&W of today needs to sell TODAYS guns to make money and stay in business (you know... so the workers can feed their families?)
I wish I could jump on the Smith bashing band wagon... but the truth of the matter is that if you had purchased a new gun from the new company you would have had a working gun back in your hands long ago, and for free.