It was a flawed system, but it really benefited Reddit. Volunteer mods did it because they were supposed to be the leaders of their communities and reddit was supposed to just be a platform for hosting them. By attacking that system they removed the main incentive for volunteer mods to exist.
Yeah it really went from "This is your community. You created it and can run it how you want. Reddit is just a collection of loosely-connected, privately-run forums" to "This is my subreddit and I expect you to work for free making it nice for me, even though you created it."