GPAs effect future placement, public schools become competitive with private schools, private schools are incentivized to differentiate and do so on placement, public schools change to meet expectations.

That’s what I’ve always imagined.

Everybody knows Americans are so much smarter these days

My first thought was: there's almost no incentive to give a student a bad grade. Institutions want their students to do well in the marketplace, and giving bad grades doesn't accomplish that. The only downside to bad grades is that your institution's reputation might suffer in the long run if you graduate bad students, but it's not clear who within the university is properly incentivized to think about those long term consequences.

My second thought was: nowadays the bigger reputation signal of a university's quality is how selective they are in admissions, and not what they actually teach the students. There's data showing that over this time period, average SAT scores became much more correlated with ranking, suggesting that students are more and more sorted by talent at the entry point. If university reputation is based on selectivity up front, then grades out the door matter less. The increase in selectivity is likely due to the increasingly national/global nature of universities, as well as the increase in demand for them.

A third idea is that selection on pedigree has become more important. That is, select students who have a good family / network. This may be especially important in a fiatized world where the Cantillon effect dominates resource allocation. Another way to say this is, who you know has become more important than what you know, which again makes coursework less important, reputation-wise.

After the ruling of Brown v. Board of Education in 1954, which invalidated segregated-schooling laws, school segregation took de facto form. School segregation declined rapidly during the late 1960s and early 1970s as the government became strict on schools' plans to combat segregation more effectively as a result of Green v. County School Board of New Kent County.[2] Voluntary segregation by income appears to have increased since 1990.[excerpt from https://en.wikipedia.org/wiki/School_segregation_in_the_United_States]

"Limited evidence on school economic segregation makes documenting trends difficult, but students appear to be more segregated by income across schools and districts today than in 1990" [Reardon & Owens (2014) https://sci-hub.st/10.1146/annurev-soc-071913-043152]