How to pick which hard drive to use for OS, which to use for storage.

I would think there would be very little difference likely nothing noticeable. However the larger drive is more energy efficient per GB not that this is probably a major concern.

so why do people choose out "fast" hard drives if its not noticeable? and what makes a HDD fast?

The key features that will increase your hard drive read and writes speeds are RPM, Interface and in some cases a RAID array. For single drives at 7.2K on a SATA controller one drive is pretty much the save as the next.

So to increase performance over a single 7.2K SATA drive you can
1. Get another 7.2k SATA drive and put it in a RAID 0 array.
2. Get a 10k RPM SATA drive instead of a 7.2k
3. Get a SAS (Serial Attached SCSI) drive (they usually run a a minimum of 10k RPM)
4. Get a 15k RPM drive (these are usually SAS rather then SATA).
5. Get two or more 10k or 15k RPM SAS drives and run them in a RAID 0 array.

Option 5 will give you the most performance however with any solution you'll notice an increase in performance over a standard 1x 7.2k SATA drive. The differences in performance between one 7.2k SATA drive and the next is so little that practical application reveals no perceived benefit. Rather things like price per GB and energy efficiency are more influential factors when buying a single SATA drive.

because Seagate had some problems with the 7200.11's, i might go
with the 320 GB as a boot drive, in that situation.

normally the 1.5 GB drive will be faster as a boot drive. 5 times
more bits are passing beneath the drive heads per second. it'll be
faster but not 5 times faster.

Not necessarily. It depends on how many platters the drive is using. Your 320 gb drive is probably a one platter where as the 1.5TB is probably a 4 platter drive.
A 1 platter 400GB drive will have a higher density and thus possible faster read speed than a 2 platter 400GB drive. Also depends on if the 320 or 1.5TB are the perpendicular drives.

so its better to use the 320 gb drive to install my os?