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.