Tim, it is just a cloth covered piece of metal that applies some damping to the strings so you can play surf music without damping with your right hand. Rather useless if you are not into that kind of music. This (jazzmaster/jaguar) was considered state-of-the-art back in the early 60´s so I guess they added a lot of stuff to make a really "modern" guitar. The internal wiring of a Jaguar is really crazy, you can do a lot with the switches on that one...
The tremolo is really cool because they are floating, its almost like playing with a floyd rose system. DIVE BOMBS AWAY!