The small castle was a bit shocking to me as well the first time I went to DL. It seemed so quaint. However, one only has to ride the much-superior POTC or Space Mountain to realize that DL has things that put MK to shame as well!
I actually thought I heard or read something recently (maybe in 60th anniversary related things? not sure) that Walt didn't want Sleeping Beauty Castle to be visible from outside of Disneyland.I believe it was made that small due to height restrictions at the time it was built.