It was either '98 or '99 I attended a seminar at Gen Con held by some of the senior WoTC staff - Monte Cook, Rich Baker, Skip Williams, among others to sort of get informal feedback from people about what they wanted to see or didn't want to see in a new edition of the game. All of it was "hypothetical, of course".
Over the course of the seminar, the panel tried to gauge which things were or were not sacred cows to people. During this, the topic of gnomes came up, and the question was asked "do you want to see gnomes in the new edition? Or could we just drop them entirely?"
The room erupted - about half of the people said they didn't care, but the other half was very adamant that they should stay "Don't take away gnomes!"
I think the panel was kind of surprised by the reaction, actually. I think they must have all felt - at least personally, the gnomes added little value. They didn't expect the positive reaction that they received in that seminar.
Thus, gnomes stayed. But it does seem that, at least at some point in the development, they were definitely on the chopping block.