According to Gerald Leonard Cohen, author of Studies in Slang Part 1 (1985), the phrase "smart alec" arose from the exploits of Alec Hoag. A celebrated pimp, thief, and confidence man operating in New York City in the 1840s, Hoag, along with his wife Melinda and an accomplice known as "French Jack", operated a con called the "panel game," a method by which prostitutes and their pimps robbed customers.
The "panel game" was a trick also used by the original Smart Alec, although not exclusively by him. Hoag was very successful at the con but was taken down when he greedily neglected to payoff his two police accomplices and protectors. While imprisoned, Hoag explained the con to a reporter, "Melinda would make her victim lay his clothes, as he took them off, upon a chair at the head of the bed near the secret panel, and then take him to her arms and closely draw the curtains of the bed. As soon as everything was right and the dupe not likely to heed outside noises, the traitress would give a cough, and the faithful Aleck (sic) would slily (sic) enter, rifle the pockets of every farthing or valuable thing, and finally disappear as mysteriously as he entered." The victim was then persuaded to leave in a hurry through a window by Alec banging on the door, pretending to be an aggrieved husband who had suddenly returned from a trip away.
Hoag later escaped from the New York prison through the help of his brother, only to be recaptured following extensive police searches, having been recognized by George Wilkes, the reporter who took his story while Hoag was imprisoned.
Professor Cohen suggests that Alex Hoag was given the sobriquet of "smart Alec" by the police for being a resourceful thief who outsmarted himself by trying to avoid paying graft. It's impossible to be certain this is the true story, since the expression does not appear in print until 1865.
Several of the more reliable dictionaries agree. The Oxford English Dictionary traces it to mid-1860s slang, while the American Heritage Dictionary (4th ed., 2000) and Brewer's Dictionary of Phrase and Fable (16th ed., 1999) tentatively trace the etymology of the phrase to Hoag."
Wikipedia/Gerald Leonard Cohen's Studies in Slang Part 1
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