One of the interesting things about the choice to use this network address was the loss of a complete A-block of addresses (a total of 16,777,215 addresses, not all of them usable). Back in the day, they never thought this Internet thing would take off, and that we'd be running out of addresses so quickly. If they had really thought about it, they could have designated something like 192.168.255.1, which would have only wasted 256 total IP addresses, 254 which were usable.
When troubleshooting your network, pinging 127.0.0.1 does check your TCP/IP stack. If it doesn't work (and you reboot to try again), you may have to reinstall the stack. You can reload the whole OS, but it's not required. In layman's terms, you're testing whether your motherboard can talk to your network card via the software.
Additional useful uses of 127.0.0.1 is to edit your LMHOSTS and HOSTS files. If you want to prevent your computer from talking to Myspace.com, for example, just put an entry that myspace.com is located at 127.0.0.1. When your kid or roommate tries to go to the malware-infested site, it ends up getting an error. The operating system checks these files when looking for a URL, and the HOSTS file is viewed first. If it's in there, the computer doesn't even bother asking a DNS server for the right IP address.