Original bank reserves are created and uncreated by actions of the Federal Reserve by buying and selling, primarily, U. S. Treasury Securities in the open market. The Federal Reserve does not use its own money or anyone else's money to purchase securities. The Fed creates a deposit by check or computer entry that is credited in a commercial bank deposit account. At the same time, the Fed credits the commercial bank's reserve account with the same amount. In short, it creates the money out of its legally endowed power of doing so.
Commercial banks use the reserve deposit as the basis on which they make loans.
The commercial banks expand reserve deposit money by a procedure known as fractional reserve deposit expansion. By this procedure, commercial banks may expand original reserves by ten times or more. Thus, higher reserve requirements should result in reduced money creation and, in turn, reduced economic activity. The Fed uncreates money by selling securities and canceling previously created deposits. Commercial banks must follow and contract their deposit expansion.