The government (or a quasi-government corporation) issues bonds, and announces that "x" percent will be paid to investors. Let's say that ten billion dollars' worth of bonds are issued. Investors buy three billion dollars and write checks from the existing supply of money. The Fed now has to buy the rest, write a check for seven billion dollars, and give it to whomever issues the bond. The seven billion dollars is created by the Fed. It did not exist before. That is the way money is created, right then and there. In the old days, when the King created money and paid it to the workmen working for him, everyone could look at the money and know it was the King's money. Additionally, when the King issued notes at his prerogative, or when the Massachusetts Bay Colony issued notes, there would have to be a proclamation such as "The Massachusetts Bay Colony is issuing 12 million pounds of currency." With such public announcements, everyone could keep track of the quantity (and therefore the quality) of that money. But now, with the Fed writing the check for seven billion dollars worth of bonds, and commingling it with three billion dollars that legitimate investors paid, there's no way to distinguish the King's money from the real money. That's really the beauty of this Federal Reserve system. It homogenizes the money.