In practice the principal function of college grades (as with standardized test scores) seems to be to reduce the number of students applying to grad schools - easing the workload of understaffed grad admissions departments while maintaining a "high graduate admissions rate" for the college that discourages students from applying. (This is particularly important for med schools, which sharply limit the number of slots so as to restrict the supply of physicians.)

In some cases grades provide useful feedback as far as how well students are learning the material, but that doesn't seem to be the primary goal.

I'm disappointed that UC Santa Cruz adopted a more traditional grading system and (in 2010) largely abandoned the narrative evaluation system that it pioneered when it was founded.