Is there anything wrong with creating a very large log file? I've been given the task of finding out why our server is slow. First of all I did not set this server up.

Is there anything wrong with setting the initial log file size to 70GB? That's what ours is currently set to, and then 10MB after that.

And just so I understand- when a 70GB log file is created, it actually takes up that much space on the drive, correct? Because I initially thought the log file may be that big because it hadn't been backed up, but I backed it up and set it to truncate the log file. It backed it up, and created a new log file, but it was still 70GB.

From a performance standpoint, is there anything wrong with this?
There is nothing wrong with setting the initial log size to 70GB, if you need that large of a transaction log.  There is a problem, however, with it set to grow in 10MB increments.  Such a small increment of growth can result in numerous VLFs (Virtual Log Files) which can result in long recovery of the database during startup and lengthen restore times.

You are correct that the log file consumes the disk space regardless of how much data is actually in the log.  Backing up the transaction log does not decrease the size of the file.  Either the file was initially created that large, or it grew to that size over time, or because of a large insert operation or something.  If it grew to that size over time, you should run DBCC LOGINFO and see how many VLFs you have.  If you have thousands, then you will want to fix that by following the steps lined out here: http://support.microsoft.com/kb/2455009