My very rudimentary understanding is that if the amount of money flowing around the system is static (or reducing), then the money itself will increase in value

My very rudimentary understanding is that if the amount of money flowing around the system is static (or reducing), then the money itself will increase in value over time (scarcity + demand). In that situation, it's (individually) most rational to hold on to your money and never spend it - it'll be worth more the longer you hold! This then results in the flow of money in the system trending towards zero. Which means everything locks up. So tl;dr static money supply directly leads to the economy grinding to a halt.