Another excerpt from Secrets of the Temple:

New money was created not only by the Federal Reserve but also by private commercial banks. They did it by new lending, by expanding the outstanding loans on their books. Routinely, a bank borrowed money from one group, the depositors, and lent it to someone else, the borrowers, a straightforward function as intermediary. But, if that was all that occurred, then credit would be frozen in size, unable to expand with new economic growth. On the margins, therefore, bankers expanded their lending on their own and the overall pool of credit grew - and the bank credit turned into money.

A bank officer authorizes a $100,000 loan to a small-business man - a judgment that the businessman’s future earnings will be sufficient to repay the loan, that his enterprise would create real value in the future, which would justify the risk and the creation of the additional money. Ordinarily the banker would not hand over $100,000 in dollar bills. He would simply write a check or, more likely, enter a credit in the businesman’s bank account for $100,000. Either way, money has been created by the simple entry in a ledger. Implausible as that might seem, it was a reality that everyone would accept, even if they were unaware of its audacity. The businessman would go out and spend the money, writing checks on his new account, and everyone would honor their value. The creation of new money, thus, was really based on bank-created debt. This concept is what baffled and outraged so many critics of the money system. Money ought to be "real," they insisted. It should be based on something tangible from the past, accumulated wealth like gold, not on a bankers hunch about the future.