To create a new library, either click the "New Library" button in the iPhoto Library Manager window, or select "New Library" from the File menu. You will then be prompted to choose a name and location for the new library. It is recommended that you not put one iPhoto library inside another, in order to avoid confusion and possible conflicts with iPhoto.

When the library folder is first created, it will initially be empty; files will be created inside the folder the first time you open the new library with iPhoto. To open your newly created library, click the round button next to the library's name to make it the "current" library, then relaunch iPhoto to see its contents (which will of course initially be empty).

See also:

Adding a library

Removing a library

Duplicating a library

Moving a library

Renaming a library