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How can I code it to use the normal block title if the image isn't there?
I'm afraid - you can't do it with HTML and Smarty.
From other side - your solution of using <{$block.title}>.jpg is not portable and windows-centric. Block titles can (and have most times) spaces between words, and spaces is disabled char in filename in *Nix.world.
I think about something like (after you'll solve "filename problem") extending login procedure (or periodical job) in PHP
- get blocks list
- get images list
- generate with GD images for missing block-titles
As starting point for this task you can see at GD-Theme in e107 (where images for blocktitles generated automatically)