I like both, but I'd have to say I like squats the best. You can't get the same workout for your legs doing deadlifts that you can with squats. Deadlifts, however, I'd think should be a prerequisite for squats, in that they allow you to build up your lower back strength so that your body can support the barbell for the squat. I never use a machine for barbell squats, I use a squat rack that has "catches" (whatever they're called), so that if for some reason I squatted down too far and couldn't get the bar back up, I can basically just sit back and these catches will catch the barbell for me.
If you ever have to pick up a friend and carry them on your back, you have to be able to hold them steady while moving over possibly rough terrain; no smith machine can simulate that, but a reg. barbell squat can. Just make sure your back and abdominals are strong enough is all.
I have never had any strength problems with my lower back in terms of it getting stressed too much supporting the barbell while doing squats.
Personally I say do both though. Deadlifts and squats are both awesome exercises!! Both build up some real strength too.
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"NOTE - never piss off a guy who can clean in excess of 350lbs as the upward pulling motion transfers very nicely to the atomic wedgie" - lifter
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