Well remember Psychiatry in the early days did not have the tools to treat the diseases. Just like we didn't have antibiotics to treat infectious disease. That lead to improvised therapeutic strategies that I believe contributed to the (still standing) stigma. Things like subconscious theory, repressed memories, basically intangible things influencing the makeup of disease. These were not altogether logical connections to make, and so the impression of psychiatry was that of a pseudo or imaginative science.
I don't really know how one can dispute that chemical imbalances are what contribute to mental illness. To deny the fact that all mental illness has physiological manifestation is to be completely ignorant of data, facts, and the long history of clinical studies demonstrating things like maoi's drastically improving cases of severe depression, and anxiety disorders. Other drugs like SSRIs, treating depressive/anxiety disorders as well. Antipsychotics successfully treating previously intractable schizophrenia.
Also peripheral support such as patients with dopamine deficiency in parkinson's disease having significantly higher rates of social anxiety disorder than the general population.
Now, alternative treatments exist such as CBT for anxiety disorders, but this too has a physical mechanism involved, as shown by physical augmentation with drugs that work with CBT to better the results. The brain has many pathways, but the fact that a non medication based treatment is effective does not disprove the larger dataset that medication is the predominant treatment of mental illness and hence mental illness is a physical manifestation.