I have heard many variations of the origins of the belt system. It mainly came from judo. Everyone would have a white belt until they achieved dan status. It was the same in Goju.
One story that stood out and I like (although it may not be 100% factual) is that you got a white belt and you just did not wash it, it turned from white to yellow to a greeny brown and eventually black due to all the sweat, dirt, grass stains ect from years of training.
It is sad that a simple system got bastardized into a big money maker for some business men who open mcdojos. I remember talking to someone who did something called "Sun Hang Do" and for each belt they got they would have so many stripes that all required grading (that you had to pay $150.00 for). Once they had gotten a new stripe on the belt they would have to buy a new belt that had another stripe embroidered on it. On top of that once they changed belt color they had to buy the matching Gi. Cheap quality gis that they would pay close to $100 for that cost them under 10 bucks to make. That school had several 8th degree black belts.. it made me wonder how much money they blew to get to that "level".
^ not to mention the countless weapons they had to buy directly from the school. They would not let weapons purchased outside of the gym be used.
Glad my school was traditional and held in a community hall. My sensei only charged us to cover the hall rental. No profit for him at all. We had multiple belts (white, green, brown and black) but they would be given to us free of charge once we passed the grading. I miss doing Goju =[
Tony Naemi - If your system awards ranks, then you can receive whatever that system gives you be it a belt as some no-gi schools do or armbands as some Muay Thai schools do.
Giving competitors belts gives them some to strive for and is also an easier way to gauge what level people are at.
Jesus Christ!
Good post but was it worth waiting 12 yrs to make it??
In my experience if people use the belt system out of context, it's metaphorical. Robert Drysdale referred to himself as a blue belt in striking, he wasn’t claiming a rank he was just using familiar terminology to describe his level.
And even if somebody is legitimately claiming a black belt in grappling, how does that affect this guy any more than a 10-year-old with a black belt in Karate?
Someones belt level is symbolic of their skill level.
My instructor, David Lea, was given his NoGi Black Belt from Chris Brennan.
Brian McLaughlin -I believe the belt sytem is actually a tradition barrowed from swimming - where they certainly aren't wearing a gi.
"Later the Japanese public schools were using the Kyu / Dan system as a means to rank ability throughout the different athletic departments. These departments were using belts or ribbons to identify ranking ability, most notably within swimming, where advanced swimmers wore a black ribbon around their waist to separate them from beginners in swimming tournaments"
http://www.shiseiryu.com/originsofjudosgradingsystem.htm
Tell me more of this.... I never saw that before. Actually that's a better historical foundation than most. 
I know Brian Jones the creator of this video. He is from KY and a great grappler. He runs a great program in Frankfort KY if you are ever in the area :-)
I think we should be complete grapplers regardless of the clothing we are wearing and ranked by our formal instructors thusly.
For example you grapple great in a swimsuit, but how do you do in a jacket and trousers? Your skill shouldnt suffer because of what you wear.
My 2c 
It boils down to people wanting others to respect them I think. Saying you are advanced level submission grappler is not as cool as having a black belt in nogi.
Tony Naemi - If your system awards ranks, then you can receive whatever that system gives you be it a belt as some no-gi schools do or armbands as some Muay Thai schools do.
Giving competitors belts gives them some to strive for and is also an easier way to gauge what level people are at.
The legends of the "Lurker God" are true!