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Race for State Assembly

Keeping his promise to Milk, newly elected Mayor George Moscone appointed him to the Board of Permit Appeals in 1976, making him the first openly gay city commissioner in the United States. Milk considered seeking a position in the California State Assembly. The district was weighted heavily in his favor, as much of it was based in neighborhoods surrounding Castro Street, where Milk's sympathizers voted. In the previous race for supervisor, Milk received more votes than the currently seated assemblyman. However, Moscone had made a deal with the assembly speaker that another candidate should run— Art Agnos. Furthermore, by order of the mayor, neither appointed nor elected officials were allowed to run a campaign while performing their duties.

Milk spent five weeks on the Board of Permit Appeals before Moscone was forced to fire him when he announced he would run for the California State Assembly. Rick Stokes replaced him. Milk's firing, and the backroom deal made between Moscone, the assembly speaker, and Agnos, fueled his campaign as he took on the identity of a political underdog. He railed that high officers in the city and state governments were against him. He complained that the prevailing gay political establishment, particularly the Alice B. Toklas Memorial Democratic Club, were shutting him out; he referred to Jim Foster and Stokes as gay " Uncle Toms ". He enthusiastically embraced a local independent weekly magazine's headline: "Harvey Milk vs. The Machine". The Alice B. Toklas Club made no endorsement in the primary—neither Milk nor Agnos—while other gay-aligned clubs and groups endorsed Agnos or did dual endorsements.

Milk's continuing campaign, run from the storefront of Castro Camera, was a study in disorganization. Although the older Irish grandmothers and gay men who volunteered were plentiful and happy to send out mass mailings, Milk's notes and volunteer lists were kept on scrap papers. Any time the campaign required funds, the money came from the cash register without any consideration for accounting. The campaign manager's assistant was an 11-year-old neighborhood girl. Milk himself was hyperactive and prone to fantastic outbursts of temper, only to recover quickly and shout excitedly about something else. Many of his rants were directed at his lover, Scott Smith, who was becoming disillusioned with the man who was no longer the laid-back hippie he had fallen in love with.

If the candidate was manic, he was also dedicated and filled with good humor, and he had a particular genius for getting media attention. He spent long hours registering voters and shaking hands at bus stops and movie theater lines. He took whatever opportunity came along to promote himself. He thoroughly enjoyed campaigning, and his success was evident. With the large numbers of volunteers, he had dozens at a time stand along the busy thoroughfare of Market Street as human billboards, holding "Milk for Assembly" signs while commuters drove into the heart of the city to work. He distributed his campaign literature anywhere he could, including one of the most influential political groups in the city, the Peoples Temple. Milk accepted Temple volunteers to work his phones. On February 19, 1978, Milk wrote a letter to President Jimmy Carter defending cult leader Jim Jones as "a man of the highest character" when asked. Milk's relationship with the Temple was similar to other politicians' in Northern California. According to The San Francisco Examiner, Jones and his parishioners were a "potent political force", helping to elect Moscone (who appointed him to the Housing Authority), District Attorney Joseph Freitas, and Sheriff Richard Hongisto. When Milk learned Jones was backing both him and Art Agnos in 1976, he told friend Michael Wong, "Well fuck him. I'll take his workers, but, that's the game Jim Jones plays." But to his volunteers, he said: "Make sure you're always nice to the Peoples Temple. If they ask you to do something, do it, and then send them a note thanking them for asking you to do it."

The race was close, and Milk lost by fewer than 4,000 votes. Agnos taught Milk a valuable lesson when he criticized Milk's campaign speeches as "a downer... You talk about how you're gonna throw the bums out, but how are you gonna fix things—other than beat me? You shouldn't leave your audience on a down." In the wake of his loss, Milk, realizing that the Toklas Club would never support him politically, co-founded the San Francisco Gay Democratic Club.