Buying bread from a man in Brussels
He was six-foot-four and full of muscles
I said, “Do you speak-a my language?”
He just smiled and gave me a vegemite sandwich—Men At Work, “Down Under”
The “Common Tongue” is one of many old-school D&D conceits: a single widely-known language that all humans speak. Depending on what historical era you’re using as a template, this isn’t necessarily far off the mark; Latin was certainly a world language in Roman times, the term “lingua franca” was coined for a reason in France’s heyday, and English is itself an effective common tongue. On a more regional scale, there have been dozens of languages that served as common tongues in some smaller segment of the world.
But what about non-humans? Do orcs know Common? What about gnolls, ogres and lizard men? Or the game’s eponymous dragons?
By the book, dragons capable of speech always know the Common tongue, while 20% of all other talking monsters also know Common. As such, any sizable group of intelligent monsters is almost certain to have at least one member that can communicate with the party. This makes knowledge of specific monster languages less essential to the party for purposes of communication (though still useful for listening in on their private conversations). It also makes negotiation a lot more feasible, providing a reliable alternative to combat for parties thus inclined.
(Conversational monsters also automatically know their alignment tongue. This is generally a better bet for purposes of communication, as long as you can trust your party’s interlocutors when they don’t share your alignment.)
All of this is important to keep in mind for DMs inclined to tweak the rules to match their ideas for their setting. If monsters don’t share a language with the player characters, negotiation becomes a lot more difficult. You’re more likely to see combat become the standard—indeed, the only—mode for resolving encounters, while the alliances with monster factions that are characteristic of Gygaxian play go by the wayside.
Charlatan
Eric Minton
maldoor
Greengoat
David Wellington
James Nostack
tavisallison
The Mule Abides 
I’d reckon that any creatures capable of trade with a culture will speak that culture’s language. If trade in an area is vibrant enough, a language will either rise to prominence (English has become so widely spoken for commercial reasons) or be created (pidgin languages).
I’d take it on a case-by-case basis. In the sandbox I’m working on, the people in the north end of the kingdom who trade with the dwarfs speak Dwarf, since they have a good deal of economic power and can dictate the terms, while tribesmen in the south who deal with the southern part of the kingdom have developed a pidgin tongue that works between the two of them. The limited (and often negative) contact between elves and humans means that there is very little linguistic exchange between the two cultures, and what is is usually facilitated by the magic.
I’m still wrestling with a balance between plausibility and ease of play. The old, “race X speaks every language of it’s allies and enemies plus common” just plain annoys me. Just say everyone everywhere speaks common and be honest about it. And even everyone speaking common bothers me some. In principle I’d rather have languages be a big deal and need to deal with translation. But I’ve yet to find something that follows that inclination and still lets the game flow.
Since you mention it, I think one useful step would be to drop the word “common” from the game and have there be a specific lingua franca/English/Latin. So the educated and cosmopolitan speak Elven, or Ancient Frabjous or whatever. But not as a gimme that every person of every PC race always speaks, I’d still make it a language choice.
One thing to think about here is whether Intelligence matters to anyone other than Magic-Users. Traditionally, INT gives you the ability to speak and read multiple languages. This isn’t much of a benefit if the monsters you encounter are highly likely to speak Common. (It’s also not much of a benefit if you only speak 1 language and there are 20+ languages in the campaign: odds are slim that you’ll pick something useful.) I guess you can still make INT useful by posing puzzles through written languages, but with the Read Languages spell and a Burglar’s ability to decipher codes, INT still gets side-stepped.
Back when I was running, I took 4e’s approach: there are 10 languages, but few monsters speak Common, meaning that traveling with an Elf, Dwarf, or Magic-User (or Bard) was very advisable because you could negotiate your way out of some problems.
It was always a tense moment in my old group when we approached a bunch of non-humans and scrambled to see who spoke their language. Usually while muttering under our breaths, “Please someone besides the mage, please someone besides the mage..”