It was totally the city's fault because the city owned the tunnels. See the FAQ: http://users.ameritech.net/pokeefe571/ctcfaq.htm

Q: Why were the tunnels under State Street and Dearborn Street demolished to make room for the rapid transit subways? Didn't the Tunnel Company have any say so in the matter?

A: The Chicago Tunnel Company owned only the locomotives, rolling stock, track, and overhead wire. The City of Chicago owned the tunnels. Because of this, the Tunnel Company didn't have much choice but to give up their most profitable trackage when subway construction was started by the city. You can't fight City Hall!