You have absolutely no say in what art hangs in your MI's home. Why make this a bone of contention? You're losing respect if you pursue this path. This is shaping up to be a political struggle for power. Is that what you want?
The fact that your g/f and her mom agreed to hang your art should please you. You MIL is not keeping her former son-in-law's art to vex or spite you. If you feel umcomfy going there and seeing it, you have a choice of either getting over it or visit there less but still visit with them elsewhere out of her home.
By making this fuss over the image, you've called attention to your smaller and quite fragile ego. If he was a **** to your g/f-fiancé, then it's up to your g/f to ask her mom not to hang the image. If it doesn't bother her, you should get over it yourself.
To her credit, she spent some time considering what she should do...and was considerate of your feelings in this matter. Respect her decision and do not make this a deal-breaker.
Furthermore, she has agreed to take down the large picture in her place. This was appropriate. Figure out a way to take this all in stride. Whether there's some level of competition and envy over artistic ego is be mixed in I can only speculate...but the main thing is ... somehow let this stuff die down.
If you love her and this time of your life, then show that love to your girlfriend and the harmony you two are creating. Then enjoy the harmony being engaged and don't let this get in the way of a future marriage.