I thought this was a good question, so I looked up monetary supply... and got this from Wiki, wouldn't ya know it, its about as clear as mud. I guess the Fed buys Treasury notes, and dispenses cash in return. I'm pretty sure its all just sleight of hand however, as no gold or production base is used to determine how much money can be put into circulation.
Monetary policy in the United States is determined and implemented by the United States Federal Reserve System, commonly referred to as the Federal Reserve. Established in 1913 to provide central banking functions, the Federal Reserve System is a quasi-public institution. Ostensibly, the Federal Reserve Banks are 12 private banking corporations; they are independent in their day-to-day operations, but legislatively accountable to Congress through the auspices of Federal Reserve Board of Governors. The Board of Governors is an independent governmental agency consisting of seven officials and their support staff of over 1800 employees headquartered in Washington, D.C. It is independent in the sense that the Board currently operates without official obligation to accept the requests or advice of any elected official with regard to actions on the money supply, and its methods of funding also preserve independence. The Governors are nominated by the President of the United States, and nominations must be confirmed by the U.S. Senate. The presidents of the Federal Reserve Banks are nominated by each bank's respective Board of Directors, but must also be approved by the Board of Governors of the Federal Reserve. The Chairman of the Federal Reserve Board is generally considered to have the most important position, followed by the president of the Federal Reserve Bank of New York. The Federal Reserve System is primarily funded by interest collected on their portfolio of securities from the US Treasury, and the Fed has broad discretion in drafting its own budget, but, historically, nearly all the interest the Federal Reserve collects is rebated to the government each year.
The Federal Reserve has three main mechanisms for manipulating the money supply. It can buy or sell treasury securities. Selling securities has the effect of reducing the monetary base (because it accepts money in return for purchase of securities), taking that money out of circulation. Purchasing treasury securities increases the monetary base (because it pays out hard currency in exchange for accepting securities). Secondly, the discount rate can be changed. And finally, the Federal Reserve can adjust the reserve requirement, which can affect the money multiplier; the reserve requirement is adjusted only infrequently, and was last adjusted in 1992.
In practice, the Federal Reserve uses open market operations to influence short term interest rates, which is the primary tool of monetary policy. The federal funds rate, for which the Federal Open Markets Committee announces a target on a regular basis, reflects one of the key rates for interbank lending. Open market operations change the supply of reserve balances, and the federal funds rate is sensitive to these operations. In theory, the Federal Reserve has unlimited capacity to influence this rate, and although the federal funds rate is set by banks borrowing and lending funds to each other, the federal funds rate generally stays within a limited range above and below the target (as participants are aware of the Fed's power to influence this rate).
Assuming a closed economy, where foreign capital or trade does not affect the money supply, when interest rates go down, money supply increases. Businesses and consumers have a lower cost of capital and can increase spending and capital improvement projects. This encourages short-term growth. Conversely, when interest rates go up, the money supply falls, increasing the cost of capital and leading to more conservative spending and investment. The Federal reserve increases interest rates to combat inflation.
BTW, From what I have read, almost all of your Federal Income Tax money goes directly to paying the interest on the national debt. All funds for government services, like education and transportation infrastructure, come from other taxes like property taxes and gasoline taxes.