Smith had overseen five straight victories since taking over from John Lloyd in 2010, but Belgium went into the match as big favourites and justified their billing at Braehead Arena.
All Belgium's four players were ranked more than 100 places higher than Britain's number one for the tie, Josh Goodall, and that quality told as the world number 253 went down to David Goffin 6-4 6-4 6-4 to give the visitors an unassailable advantage after four rubbers.
February's victory over Slovakia ensured Britain's Europe/Africa Zone Group I status was preserved following their promotion last season, and they will not play again until next spring, while Belgium go forward to September's World Group play-offs.
But Smith also said that he saw enough to believe there are better times ahead for the team.
Smith said: "It's a good level. If people didn't enjoy the standard of tennis this weekend then they're watching something else.
"That's been high level from start to finish, and that's why we worked really hard to get to this position, to play against quality opposition."
Goodall had been due to play Olivier Rochus but the Belgian number one was still struggling with the thigh problems that troubled him against Dan Evans on Friday, so Goffin, playing his first Davis Cup tie, stepped in.
On paper it looked positive news for Britain but the 21-year-old is a rising star and went into the tie having climbed to 112th in the rankings on the back of winning a significant Challenger title last week.
And Goffin showed his talent from the start, his groundstrokes and movement so much sharper then Goodall, who lacked nothing in courage or determination but was simply outclassed.
Goffin broke serve in the third game of each set, and although Goodall briefly levelled matters in the third, he expended all his energy winning a titanic fifth game and could not keep his opponent at bay any longer.
Smith said: "We talked beforehand about leaving everything out there on the court and Josh did that today [Sunday]. He used up every ounce of energy and fought really hard.
"Goffin looks a very good talent. Josh came out with some big serves and they just kept coming back, and that's what good players do, but I'm very proud of Josh and all the guys this weekend. I think they've acquitted themselves very well."
Without Andy Murray, who chose to stay in the US and practise on clay, the result was entirely predictable, and there is no guarantee the world number four will make himself available next year.
Smith has managed to get the best out of a succession of lower-ranked players, but he knows the chances of winning similar ties in the future rest on those players competing at a higher level during the rest of the season.
"It was always going to be a very difficult tie but we're not far away from winning," said the captain.
"It's fine margins but we go away from this weekend and what it drives you towards, and I know all the guys feel the same, is it's about getting together as a group, getting the guys focused on the day-to-day hard work and improving their rankings, which can get them into a higher level of tournaments.
"So you don't just come here and play a Goffin, you're playing that level week in, week out."
Goodall has now lost all four of the Davis Cup rubbers he has played, although he improved on his debut against Ukraine three years ago simply by winning a set against Steve Darcis on Friday.
The Basingstoke player said: "It's a different level to the last tie. I'm going to be disappointed for the next couple of hours but then I think I'm going to look back at my game and think I've definitely come on.
"I really have been working hard and I think that's what it's come down to. I'm 26 now, I've still got time but it's coming to the point where it really is make or break and I'm going to give it absolutely everything I've got, as I think I showed on the court."
The tie finished 4-1 to Belgium after Ruben Bemelmans beat Evans 6-4 6-4 in the dead rubber.