Taiki Shisei Kenpo has an pointer to an article by the late Donn Draeger on the origin and meaning of the ranking system used in both traditional and modern Japanese martial arts. An excerpt from the article is below. If you click on the title of this post, you'll be directed to the whole thing.
Ranking Systems in Modern Japanese Martial Arts:
Modern vs. Classical
Donn F. Draeger
Lecture on April 1, 1976
It began as far as we know with Kano Jigoro of Kodokan, and the first date probably 1883, about a year after he founded the system. He awarded proficiency ranks to his Judo men, his exponents, on the basis of kyu, which translated as "class" or "ungraded" ranks and "dan". These are, you can say "degrees" if you want and ranks. So that is the beginning of the black-belt system.
The dan are the so called "black belts". The people who have black belts are called, by the way, yudansha. The kyu are mudansha: mu means "nothing", literally.
Now, the black belt system is the product of the peasant class, not the warrior class. The commoners. Dr. Kano was a commoner, a wealthy commoner. His family owned a sake mill. He was a merchant, the lowest social class. Had he taken part in Tokugawa Japan, he would have been at the bottom of the social level. So, any attempt to rationalize dan (black belts) with martial training in Japan is erroneous on the basis of history. You can recognize a modern art by the very fact that it does give black belts and other kyu grades. That is one of the unfailing recognitions. Not all of them. Some of them have deliberately avoided it because of all the nonsense and politics that goes with it.
The classical arts do not use the black-belt system. Now, classical arts you must recall, run between the 8th century and 1877. But what did they use, because the Japanese, like any society, are rank and prestige conscious. As they learned from China, court ranks and so on were important in social structure. So, they used this system which they called the menkyo system. The exponents of classical arts receive menkyo and their evidence is shown on a densho or makimono. That would be a certificate of your proficiency at a certain level.
Now, there are different levels of menkyo but far fewer than black-belt. Black belt is very finely divided as are the kyu below it. The basis of it, the basis of the kyu and dan system is commercial. Don’t think it isn’t. Even in Japan. It was created for prestige and recognition, true, but for commercial purpose to keep Kodokan in business, originally. It has grown out of proportion today, not only in Japan but in the West. Many misuses and abuses, but that is not our thing to talk about today.
The menkyo system has a great integrity. There are far fewer levels. Generally there will be between three to five levels of menkyo over the whole life span. Compare that to modern systems. Depending on the system, there could be as many as ten kyu in some systems and ten different grades of dan. So there is already twenty subdivisions under the present system. The warrior system, from three to five; I have heard of one with nine and I have heard of one with two. So, my experience is, they will range from two to nine levels; far less than the kyu or the dan system. So, what the kyu and dan system means is, no big thing.