When my kids attended public school for a year, the concept of "grades" was new to them. They were only in third and fourth grades, but had never experienced the quarterly grades or "report cards" that public school families use to measure what has been learned.
Even as I type that, "what has been learned," I slightly cringe. It's assumed that if a student has straight A's that they have "learned" everything expected of him. But the truth is, all it means is that the student has simply completed everything expected of him, which has nothing to do with what he has actually learned.
If you look at grades, they are often weighted by participation, whether it is getting homework done, participating in a group project, or sometimes simply showing up. As a matter of fact, they are so subjective sometimes, they are not worth much to anyone. When I was a para for special education students, looking at report cards from one student to another told you nothing about what those students learned. One really smart kid could have a worse report card than another "low IQ" student who could barely read, simply because the requirements for each were different.
What is the point of grades? Well, really, isn't it to make the parents feel good? To let them know that their kid is doing what's expected of him? That's about it, really.
The question remains, do homeschoolers need letter grades? The true answer is...it depends.
Most homeschoolers work on a subject until the information is learned. If a test is given, we know if the student learned anything, or how much he learned. If the test reveals "not much learned" then we can repeat what should have been learned and go about it a different way. We hardly ever test. As a matter of fact, science is the only subject we test, and not until 7th grade. Because we test in science, we "could" have a letter grade for the course. But as of right now, we aren't keeping up with it. For homeschoolers who don't "do tests" of course they aren't going to have letter grades, unless they want to throw up a subjective grade based on the kids' overall performance.
Letter grades are often given once a homeschooler reaches high school courses, so that a more "official" transcript can be kept. Also, this is a good transition to grades they will receive in college. There is nothing wrong with reminding kids how their work will be evaluated by college professors and making sure they know that every test they take will count toward one letter in the end. They need to know this. I've been saying it since about 7th grade.
Another reason to give letter grades is for children who are non-compliant. My children participate in many extra-curricular activities. If I feel they are not meeting standards, keeping grades is a good way to measure this, for both me and them. I haven't done it yet, but I have stated something similar to, "Right now you are doing C work, which is not good enough for you." But I haven't felt it necessary to REALLY keep track and hang that letter over their heads. Mostly this is because if they don't meet standards, we have ALLLLL summer to get work done ;)
The difference between home school and "other" school is this: At home, we can study something until it is learned. At school, we have a small window to learn something before the class has to move on, and hopefully we were "on" that day and didn't miss the opportunity. THIS is why homeschooled kids tend to be better educated at the end of 12 years of learning. However either is graded, the reality is that homeschoolers have the opportunity to take more time when necessary, and "other" schooled don't. Whether you throw a grade at their work or not, learning is happening.
No, we don't "need" letter grades. Sometimes there is a benefit, but most times there is not. The good thing is, we can make that decision for each child. One of the many benefits of homeschooling...