[imtringued]

The economy is always deflationary because the way we create money also creates an obligation to return and destroy money so given enough time, the money supply trends towards zero no matter what you do. A higher interest rate makes it less appealing to take on a loan, which means repayment outweighs new loans which results in a net reduction in the money supply. Here is the dirty secret, you could have done the same thing by limiting reserves and increasing the reserve requirements without raising the interest rate. This is a long term effect that you can in theory do forever until your economy suffers from deflation and actually needs lower interest rates, possibly negative, to shrink the money supply.

Another reason is that a high enough interest rate makes people sell their risky assets and hold more money until the risk adjusted return on money and risky investments is the same. The latter is a short term effect that actually goes away eventually as paying a 70% interest rate makes the debt problem worse and necessitates even more debt just to pay the ridiculous interest rate.