The currency component of the money supply is far smaller than the deposit component. The Federal Reserve and the Treasury supply the banks with the currency their customers demand, and when their demand falls, accept a return flow from the banks. The Federal Reserve debits banks' reserves when it provides currency, and credits their reserves when they return currency. In a fractional reserve banking system, drains of currency from banks reduce their reserves, and unless the Federal Reserve provides adequate additional amounts of currency and reserves, a multiple contraction of deposits results, reducing the quantity of money.
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