Debated on whether to reply to this one as it's a bit of a sore point for me at the mo, but then decided you're all such nice people...
The main reason I can see for the ranking system is twofold:
a) quick way to establish some sort of pecking order in the dojo
b) some benefit from the structure of ranking to not only measure their own progress in the art but also to better understand what they're aiming at.
Now I'm not saying it's all bad, as knowing who's advice to ask (and follow) is a good thing. Also, (as the Chinese army found) no rank markers in a structured hierachy such as a dojo is almost impossible unless you have only one teacher and the rest are oiks.
I found Mr Watts comment interesting as certainly most of the arts he mentioned that had no ranking system do have a strenuous competition format, which by definition will provide the necessary information to determine "rank", perhaps aikido is compensating for its lack of competition (I know, doesn't fully explain tomeiki..)
Oh yes, why is this a touchy subject? After many successful years of avoiding all gradings, I've been put in position that I couldn't find a polite way to refuse to grade (without probably leaving my current association). I also found the more junior grades were uneasy with my lack of rank vs time in the dojo.