Simply put, there were few reasons to take a human over an elf magic-user, a human over a dwarf or half-orc fighter, a human over a demi-human thief. Most campaigns wouldn't live long enough to push up against level limits, and multiclassing could soften their sting by packing as many levels as allowed into a more slowly-advancing, super-skilled character. Then there was that other curious drawback of elves, again only really relevant at high levels: the raise dead spell wouldn't work on them because they didn't have souls.
Usually (certainly, in D&D from 2000 on) the solution is to give humans extra skills, feats, ability scores to compensate. But the raise dead peculiarity suggests another solution. Most house rules I know have some way to mitigate death at zero HP, whether it be AD&D's "bleeding out" or the kind of "death and dismemberment" rules I use in my game. Why not have these options available only to humans, or at least give humans a greater chance of surviving at 0 hit points and below?
In effect, the benefits of being a demi-human would be balanced by making them like computer games' hardcore mode, where there are no saves and death is permanent. At the very least, for example, they would bleed out at -5 instead of -10 HP, or suffer a -2 penalty to a 2d6 dismemberment table. Most harshly, they would die at -1 HP, with just the tiniest saving grace at 0.
The setting rationale could go as follows:
- Elves: Have no souls, their spirits once loosed from flesh are quick to return to the great beyond.
- Half-orcs: Likewise a bit light in the soul department. If a DM really is serious about making their social stigma count in the campaign, then they can compensate by giving only 50% of the penalty, and likewise for half-elves.
- Dwarves: Are tough, but when seriously injured, have a tendency to return to the native stone; dead dwarves turn to stone statues and can be stone-fleshed back to a point where healing can work for a little while.
- Gnomes and halflings: Have really sweet afterlives full of rollercoasters and second breakfast, and don't bother sticking around in this vale of tears.
- Humans: Are uncertain about their final destination, so cling tenaciously to life against the odds.
Really, if you play by-the-book AD&D, PCs have to be handed huge amounts of loot in order to level up, so buying raise dead spells eventually fulfils a safety-net niche similar to death and dismemberment - a risk you take with the system shock roll, but by no means the automatic end of the character. In that case, the elf drawback starts kicking in around third level or so when it becomes economically feasible to buy clerical services. But my new idea is more in line with how a lot of new-old-school DMs run games, and extends to all the demihuman races.