1. The Government wants to raise money. Rather than raise taxes (which could be political suicide), they create a gov. bond or Treasury note. This is essentially an IOU, which says they will pay it back at a specified date with a specified interest rate. It is no more than a piece of paper with ink on it, and has no more backing than just a promise to pay. Let's say it is for one million dollars.
2. The gov. gives this to the Federal Reserve System, where it is classified as a securities asset (they assume the government will pay when they say) They treat this note as an asset, so are able to balance the books with a corresponding liability in the form of a Federal Reserve check made out to the government.
3. The Fed's check is not drawn on any bank. They literally create it out of nothing. Actually, it is created out of government debt. The gov. then deposits this check into one of the Federal Reserve banks, where it becomes a gov. deposit of one million dollars.
4. The gov. pays its employees (postal workers etc)from its funds. Let's say 1,000 people receive $1,000 as wages from the government. These 1,000 people have now deposited their $1,000 into their individual accounts at commercial banks.
5. The commercial banks gladly receive the check for $1,000 and count it as an asset for the bank, even though it is a liability, as it is owed to the depositor. Now the bank's books are balanced with an equal asset and liability.
6. The bank assets are now called "bank reserves", which are to be used for paying the depositors back when they want. (hah!). However, through a useful trick the Feds allow, the banks are allowed to hold as little as 10% of their deposits in "reserve". The remaining 90% is classified as "excess reserves" .
7. The excess reserves can now be used by the bank for making loans. Think about this. If you deposit $1,000 into your account, the bank is paying you a few % interest, while they can go ahead and loan out 90% of your money
8. Bank loans out $900 at 8% or so to person A.
9. Person A's account grows by $900 (let's say it is at the same bank as your's for ease of this example)
10. The same bank now has increased its assets by $900 (this shouldn't make sense, but this is reality) because person A's account just went up by $900 when they took out the loan
11. Because the bank's assets just increased by $900, their excess reserves also went up, by 90% of $900 - in this example $810.
12. Person B comes along and takes out a loan for $810, puts it into their account at the same bank, the bank now has an additional $810 in assets, takes 90% as excess reserves
13. and so on and so on.
14. This process can go on many more iterations. If played out to the theoretical end, it loans the same money out over 50 times and at a total of 9 times the original $1,000 deposit. The bank charges the loan out at 8% or so, basically charging you interest on nothing. Isn't this a cool magic trick?
15. Add up the whole thing, and you can see that the total money introduced into the system can be up to 10 times the original gov. note.
16. Take this another step, and you have increased the nation's money supply, which leads to inflation, the hidden tax.
Video http://www.chrismartenson.com/crashcour ... ee-beliefs 
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