Probably around 1968 they had the perfect offerings available. You could get the larger diameter narrow tires (27" X 1.25) for long distance roading. You could get the fat tire (26" X 2.125) for rough roading, and you could get 26 X 1.375 for city riding. Then, in the 1990's fashion took over and common sense lost in bicycling as mountain bikes took to the streets.
I think you understand the advantages of the big+skinny and the fat-tire. I will explain the advantage of the smaller diameter narrower tire. The smaller diameter is better for accelerating. This is especially helpful in city riding where you have to stop frequently and adjust speed frequently. The smaller diameter is also easier for steering and manuverability.
Now, I noticed some posts suggesting that fat slicks are OK. NOPE. Fat tires just are not as crisp of a ride on good pavement no matter what kind of tread. Also, the suggestion that you might as well buy the 26" because it has slicks is bad advice. I think any wheel for paved streets with a with over 1.375 is silly. Even 1.375" width is more than you need on today's vast expanses of well paved roads.