The report Rethinking Sentencing: A Contribution to the Debate called for the use of restorative justice instead of custodial sentences.
The Archbishop of Canterbury Dr Rowan Williams, labelled the Government's penal policy as "scandalous".
He also accused the three main political parties of "point scoring" and trying to out-tough each other in criminal justice policy.
Addressing the Synod, which was meeting in York, the Archbishop said: "In private and increasingly in public the members of all the main political parties are prepared to agree to the situation we currently face and our penal policy is simply scandalous.
"There is no other word for it and I have heard no serious person in public life deny that."
The Archbishop of Canterbury went on to criticise the Government for overseeing a massive rise in the prison population, the locking up of women and children and the privatisation of prisons.
Over the past 15 years the prison population has nearly doubled from 42,000 in 1991 to 76,000 today.
"Programmes of rehabilitation and education in the prison system are consistently frustrated by the abnormal mobility of the prison populations, as a direct consequence of overcrowding," he said.
"These programmes are frustrated and they are not likely to be helped by some of the ideas for further privatised involvement in this area." Dr Williams went on: "There are other areas in which we can see scandal.
"We have heard from the Bishop of Leicester about the outrageous treatment of children in our penal system.
"We have heard about problems for women in prison and the disruption to family life.
"And I suspect there are members of the Synod who can speak much more eloquently about the issues surrounding the ethnic profile of the prison population."
In recent years crime and punishment has become a major vote winning issue as Labour and the Conservatives battle to "out tough" each other.
The General Synod voted unanimously to accept the report on restorative justice and "express dismay" at the ever-rising prison population, which limits the scope of rehabilitation.
The report Rethinking Sentencing: A Contribution to the Debate was written for the Mission and Public Affairs Council by a leading former Home Office civil servant, prison governors, and a Lord Justice of Appeal.
Opening the debate, report co-author Dr Peter Selby, The Bishop of Worcester, said: "Prison overcrowding, deeply damaging to the aim of restoration, are a clear image of the doctrine of original sin: everyone thinks the numbers are too high, but they continue to rise.
"Certainly, Martin Narey's (Director of Prisons) 'decency agenda' has done much to improve attitudes in the service. But a more sinister explanation lies in the way which the very proper instinctive revulsion we feel about crime, especially notorious crimes of violence, becomes through the activity of headline writers the governing dynamic of policy.
"The instincts and the feelings are very understandable and the victims of crime are entitled to our fullest sympathy and support.
"But civilisation consists in part of the channelling of such instincts into constructive and rational processes directed into dealing effectively with the problem."
The Bishop of Leicester, the Rt Rev Tim Stevens, drew the Synod's attention to the case of Joseph Scholes, who died at Stoke Heath Young Offenders' Institution, near Market Drayton, Shropshire.
Earlier this year a jury inquest returned a verdict of accidental death over the 16-year-old, who was found hanging nine days into a two-year sentence for street robberies. The coroner wrote to the Home Secretary, David Blunkett, demanding a public inquiry after the inquest heard of the teenager's history of self-harm.
Two weeks before Joseph Scholes' court appearance he slashed his face 30 times with a knife.