CREATE DATABASE actually works by copying an existing database. By default, it copies the standard system database named template1. Thus that database is the "template" from which new databases are made. If you add objects to template1, these objects will be copied into subsequently created user databases. This behavior allows site-local modifications to the standard set of objects in databases. For example, if you install the procedural language PL/pgSQL in template1, it will automatically be available in user databases without any extra action being taken when those databases are made.
There is a second standard system database named template0. This database contains the same data as the initial contents of template1, that is, only the standard objects predefined by your version of PostgreSQL. template0 should never be changed after initdb. By instructing CREATE DATABASE to copy template0 instead of template1, you can create a "virgin" user database that contains none of the site-local additions in template1. This is particularly handy when restoring a pg_dump dump: the dump script should be restored in a virgin database to ensure that one recreates the correct contents of the dumped database, without any conflicts with additions that may now be present in template1.
To create a database by copying template0, use
CREATE DATABASE dbname TEMPLATE template0;
from the SQL environment, or
createdb -T template0 dbname
from the shell.
It is possible to create additional template databases, and indeed one might copy any database in an installation by specifying its name as the template for CREATE DATABASE. It is important to understand, however, that this is not (yet) intended as a general-purpose "COPY DATABASE" facility. In particular, it is essential that the source database be idle (no data-altering transactions in progress) for the duration of the copying operation. CREATE DATABASE will check that no backend processes (other than itself) are connected to the source database at the start of the operation, but this does not guarantee that changes cannot be made while the copy proceeds, which would result in an inconsistent copied database. Therefore, we recommend that databases used as templates be treated as read-only.
Two useful flags exist in pg_database for each database: the columns datistemplate and datallowconn. datistemplate may be set to indicate that a database is intended as a template for CREATE DATABASE. If this flag is set, the database may be cloned by any user with CREATEDB privileges; if it is not set, only superusers and the owner of the database may clone it. If datallowconn is false, then no new connections to that database will be allowed (but existing sessions are not killed simply by setting the flag false). The template0 database is normally marked datallowconn = false to prevent modification of it. Both template0 and template1 should always be marked with datistemplate = true.
After preparing a template database, or making any changes to one, it is a good idea to perform VACUUM FREEZE or VACUUM FULL FREEZE in that database. If this is done when there are no other open transactions in the same database, then it is guaranteed that all tuples in the database are "frozen" and will not be subject to transaction ID wraparound problems. This is particularly important for a database that will have datallowconn set to false, since it will be impossible to do routine maintenance VACUUMs on such a database. See Section 8.2.3 for more information.
Note: template1 and template0 do not have any special status beyond the fact that the name template1 is the default source database name for CREATE DATABASE and the default database-to-connect-to for various programs such as createdb. For example, one could drop template1 and recreate it from template0 without any ill effects. This course of action might be advisable if one has carelessly added a bunch of junk in template1.