Fold your fabric in half. The folded part (shown as the top of this pic) will be the bottom of your bag. Cut your fabric (My white line is where I cut it) for however wide you'd like the bag to be. The black lines show where the stitches will go, so make sure to have an extra 1/2 inch on the sides for sewing. I wanted my bag tall, but if you want your bag shorter, trim the extra length off.
Sew up the sides of the bag ending 1 inch from the top (you need the gap for your drawstring). Fold the extra inch over, and sew it down. This should create a long thin pocket for your drawstring to go through.
I used a stretched-out wire hanger to push my ribbon through the drawstring pocket. This was pretty easy because the ribbon was wide. I'm not sure the best way to do this if you're using a thinner drawstring. If anyone has any other suggestions, please share... I love to learn.
Now that all constructive sewing is done, flip the bag inside out to hide the fringe. You can use a Cricut to cut out perfect felt letters, but I liked the hand cut letters better. With the letters unattached from the bag, I stitched around each of them with gray yarn. I love the blanket stitch! I couldn't get the letters to stay flat when sewing them onto the bag, so I used a hot glue gun to attach instead. Much faster.
For a Christmas gift this bag is being filled with drink mixers, rimming salt and sugar, and crumpled newspaper. I love the sack of coal idea, but getting a gift-exchange present to come up to $50 with mostly drink mixers has become extremely heavy. Whoever picks it is going to have a hard time getting it out from under the tree. Oops.
Jan 2011 Update: I stole my own gift at the gift exchange. Kinda silly to drive that heavy gift all the way to TX just to bring it back, but I couldn't resist. :)