There's a commitee run by the AMGA that has a field team that goes out and inspects climbs. Once you climb a route or a problem for the first time, you give it a name, and you fill out a form that you can print from their website. It's been a while since I've done this, but it used to be you had three people climb the route, and each one chooses a grade that they think the climb deserves. Then they each put that grade on the form, sign and date it, and enclose a climbing resume. After a small wait, usually 8-12 weeks, the AMGA will contact you about verifying the route/problem. They will set a date, usually a couple weeks in advance, when you and at least one of the other climbers who's sent the route must demonstrate a clean ascent in front of the field team, who then act as a notary to certify that you indeed did climb the route. (The AMGA actually used to require that all three members of the FA team perform a whitnessed clean ascent, but they've eased their requirements in the last few years.) Then two members of the field team attempt the problem, and upon successful completion, they will each assign a grade. With the four grades in hand, the highest and the lowest are discarded, and the middle two are averaged. If the average is not an even value, the lower full number or letter grade is assigned. Naturally, because the AMGA teams are typically lowsy climbers, it can be quite difficult to assign a grade to harder problems (anything over .12 or V5) and often very hard routes/problems require repeat attempts and often bribes from the first assentionists to expedite the process. As you can imagine, it could take several years to grade a 5.14, which is why so many of them are refered to as 'Project'.

I hope this helps! Happy Climbing!

As far as gym climbing goes, the problem I see with people setting their own routes and grading goes as this:

"I climb v3's, and thats a v4 because it took a while to send it." - 2 weeks later - "I climbed my v4, and THIS NEW ONE was harder than that, so it's probably a v5." - so on and so forth, until there are v7's that even a novice could flash. I have seen this done, and it is annoying.

Likewise, areas where I am from (So Cal - woodson, etc) depends on the climber who rated them in the first place. A reachy problem will get a lower grade from a tall person, a hard overhang will be over rated (sometimes). I never know how a grade will end up being, if grades were really to be accurated they would have to give into accout rock type, crack or face, lenght, etc etc, and while some do, until you get into the competitive .12 - .14 grades, it's all ballpark, in my experience. :P

Finally, this is one of the best post I have read on this site, THANks.

Not just for a good read, but for clarifying the process. I always thought it was the American Alpine CLub that rated routes.