Why did Captain Smollett turn down Silver's proposal (chapters 16–19)?

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This is not actually in the chapters you are asking about -- it is in Chapter 20.  At the end of Chapter 19, Silver shows up with the flag of truce.  In the next chapter he makes his proposal and is rejected.

Smollett rejects him because he thinks the pirates are in trouble there on the island.  He says they can't sail the ship away because 1) none of their men is "fit" to said it and 2) the ship is "in irons" (meaning it's pointed into the wind and can't sail) on a lee shore (with the wind blowing towards the shore).  He says they can't fight very well, as shown by how they let Gray get away from five of them.

So Smollett is saying that the pirates need him so he's not going to agree to their proposal.

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