Just got around to reading the original post and the following discussion. Great discussion, folks (although by no means complete yet)!
My personal belief: this is one of the most important issues in education. To grade or not to grade, how to grade, what to grade, etc. How to motivate without squashing the desire to learn.
Notice (one response sort of mentioned this) that assigning grades doesn't do a whole lot to motivate those students who don't care that much about their grades. [I guess this is truer at the college level, when the parents are less likely to be involved in the picture.] In many (probably the great majority, but definitely not all) cases, the students who are most motivated to get good grades would be among those most motivated by a desire to learn. So perhaps the good done by giving grades is mostly wasted except on those to whom it does harm. (That's probably not clear; at least *I* know what I meant.) I mean, grades don't necessarily motivate the very people we are giving grades to to try to motivate. And conversely, they devalue the educational experience for many of the students who don't need the motivation.
In any case, just as there are different learning styles and we have to try to teach in a variety of modalities, different grading procedures are likely to be needed to reach everyone. Also, I strongly suspect it is not just the educational system which changes young people. Most of us just naturally lose our sense of wonder and exploration as we become jaded about the world and its marvels.
Thanks to all who shared their experience, experiments, opinions (and heavy sighs). I will make use of some of your ideas. I'm a great plagiarizer.
Rick Simon U of La Verne La Verne, California email@example.com