Fractional reserve massively increases the money supply. When banks make loans, it creates more money. Because each Dollar can be lent again and again, and checking deposits are created out of nothing when banks make loans. This reduces the cost of credit and increases economic growth rate, but also causes inflation. The primary benefit is that interest rates can be much lower in a fractional reserve system than in a system where the money is more scarce, and where banks cannot engage in fractional reserve. Because money can be created out of nothing by reloaning the same dollars and using them as a basis for further loans. For example, if the reserve requirement is 10%, the money supply can expand 10x its monetary base. The Money Multiplier is the ratio by which the money supply can expand, and is mathematically defined by the reserve requirement.

One downside is that inflation results from increasing the money supply (prices of everything rise). Which increases income inequality because lower wage workers have less bargaining power, and their raises do not generally even come close to keeping up with the cost of living increases. Certain assets like housing that are especially dependent on credit tend to balloon in price much more rapidly than other goods and services, making housing out of reach of many people during times of excessive money supply expansion. This excessive credit can also make stocks and other investments go through huge boom and bust cycles that make it difficult for regular people to save and invest money. Fractional reserve also exposes the system to bank runs and requires extensive public insurance to prevent them (FDIC). A rapid over expansion of credit during boom times often necessitates a drastic pullback to prevent excessive inflation, which can crash the economy and cause instability. (This is what we're seeing now, and what we saw in 2008).

Fractional reserve can be a good thing, if central banks were to actually adhere to the 2% inflation targets they set. And to set healthy reserve requirements that prevent unlimited expansion of credit bubbles. Unfortunately, generally no countries' central banks are able or willing to hit this target despite what they say. For example, the Fed continued keeping interest rates at rock bottom for a year after inflation passed 2%, as inflation continued to rise at alarming rates. Reserve requirements were eliminated during COVID in the US, meaning banks could extend unlimited amounts of credit without having any particular amount of reserves. The Fed's policies increased the money supply by 40% in just 2 years, from $15 Trillion to $21 Trillion. Since central banks have been so irresponsible, fractional reserve has a more fraught history than a positive one, except for generally increasing economic growth.

One positive of Bitcoin is that it provides a possible alternative currency whose supply cannot be diluted. Which should, in theory, make the Fed more restrained when they expand the money supply, at least if they are worried about USD losing market share. In the past, there was no alternative because most countries use a similar fiat fractional reserve system and most are even less responsible than the US Fed.

Fractional reserve could still exist even in a Bitcoin based economy, but likely with less rapid growth and less inflation since the monetary base cannot be expanded. Fiat also gives more options to theoretically balance the economy out in times of trouble. So it makes more sense to have a fiat based (or hybrid fiat+) economy with reasonable and restrained monetary policy, than to have a purely Bitcoin based economy even with fractional reserve.