According to Reference.com, the cavity within a bone is called the medullary cavity. This is the place where bone marrow is found and red blood cells and white blood cells are formed.
The medullary cavity is surrounded by spongy bone and a thin membrane. Inside this cavity is soft, fatty bone tissue called bone marrow, as HowStuffWorks explains. There are two types of bone marrow: red and yellow. Red bone marrow is made up of hematopoietic stem cells and stromal stem cells. The job of stem cells is to replace and grow into specialized cells. Hematopoietic cells are largely responsible for becoming new blood cells. They replenish both the red and white blood cell counts as well as the platelets. Sometimes these stem cells even create more stem cells, depending on the need. Stromal stem cells, on the other hand, create connective tissue cells, fat cells and bone cells. Yellow marrow is made up mostly of fat, although it can transform into red marrow and produce blood cells if needed.
HowStuffWorks points out that sometimes blood marrow can become diseased, causing disorders such as aplastic anemia and myelodysplastic syndromes, which keep the body from being able to create sufficient blood cells.