A History of the Dwarven Race by Arum Tikwaas
The common belief that dwarves have always lived as they presently do, deep underground, is hugely misguided. Dwarves were clearly created with both surface and underground life in mind having darkvision, but not being colorblind like most species of the depth. Furthermore dwarven skin does not burn so easily and their eyes adjust readily to sunlight, suggesting the first dwarves split their time evenly between the surface and the underground. Perhaps they used caves for shelter and protection while hunting or farming on the surface.
What then drove the dwarves to dwell deep beneath the earth? Some would say they were compelled by greed to search the minerals beneath the earth. Others claim that as punishment for a crime they committed the dwarves were simply swallowed into the earth, surviving only by luck. The most likely scenario seems to be that they were driven underground by the rise of various Giant kingdoms. A close study of the linguistics of dwarven legends reveals that the rivalry between the dwarven gods and the Giant’s gods are the oldest stories, save those of creation itself.
Further evidence for this belief that dwarves were driven underground is found in the age of dwarven cities. The oldest dwarven cities (Gondul, Hild and Greigskogul) are all located relatively near the surface, in large caverns with access to nutrient rich water flowing down from above. Anyone who visits these cities is keenly aware that the vast majority of the inhabited space is a natural cavern and only the newest parts of the town have been carved from rock.
While there are many races who dwell under hills and boroughs there is a unsentimental difference in the way life is lived between someone who lives under a hill and someone who in the underdark.
Development of Dwarven Civillization: