The first Rainbow Flag was designed in 1978 by Gilbert Baker, a San Francisco artist, who created the flag in response to a local activist's call for the need of a community symbol. (This was before the pink triangle was popularly used as a symbol of pride.) Using the five-striped "Flag of the Race" as his inspiration, Baker designed a flag with eight stripes: pink, red, orange, yellow, green, blue, indigo, and violet. According to Baker, those colours represented, respectively: sexuality, life, healing, sun, nature, art (or magic), harmony (or serenity), and spirit. Baker dyed and sewed the material for the first flag himself - in the true spirit of Betsy Ross.
In November 1978, San Francisco's gay community was stunned when the city's first openly gay supervisor, Harvey Milk, was assassinated, Wishing to demonstrate the gay community's strength and solidarity in the aftermath of this tragedy, the 1979 Pride Parade Committee decided to use Baker's flag. The committee eliminated the indigo stripe so they could divide the colours evenly along the parade route - three colours on one side of the street and three on the other. Soon the six colors were incorporated into a six-striped version that became popularized and that, today, is recognized by the International Congress of Flag Makers.
In San Francisco, the Rainbow Flag is everywhere: it can be seen hanging from apartment windows throughout the city (most notably in the Castro district), local bars frequently display the flag, and Rainbow Flag banners are hung from lampposts on Market Street (San Francisco's main avenue) throughout Pride Month. Visiting the city, one can not help but feel a tremendous sense of pride at seeing this powerful symbol displayed so prominently.
So now you know!