LaTeX, by default, restricts the sizes at which you can use its default computer modern fonts, to a fixed set of discrete sizes (effectively, a set specified by Knuth). The type1cm package removes this restriction; this is particularly useful when using scalable versions of the cm fonts (Bakoma, or the versions from BSR/Y&Y, or True Type versions from Kinch, PCTeX, etc.). Note that the LaTeX distribution now contains a package fix-cm, which performs the task of type1cm, as well as doing the same job for T1- and TS1-encoded ec fonts.