Monetary policy has an irreplaceable role in economic policy just as money has an irreplaceable role in economic activity. The issue of a monetary system based on fractional reserve banking or full reserve banking is important from the perspective of the efficiency of the monetary system, but also from the perspective of the role of money in the economy and society. In the fractional reserve system, most of the money is generated in the process of making loans by commercial banks. Deposits created in the process of making loans are partially covered by the required reserve, i.e. cash issued by central banks. Such a system is present in all modern economies today. On the other hand, full reserve banking represents the separation of the monetary and credit functions of commercial banks, i.e. it prevents commercial banks from participating in the money-creation process. The lending activity of commercial banks in this case must have full coverage in government money. Such a system is not implemented in any state today but was used in the 19th century in the United States and the United Kingdom when banknotes issued by commercial banks were to be fully guaranteed by the state's money or gold. This paper analyzes the implications of money creation in different monetary systems, the role of commercial banks and the central bank, and the effect of the monetary transmission mechanism on real macroeconomic variables. The main differences between full and partial reserve banking are identified, together with the transmission on the cyclical nature of the economic activity and the most important disadvantages and advantages of the full reserve banking system. The results of regression analysis on the main determinants of the monetary demand in Croatia are provided in the empirical part of the paper.