My Mac removed local copies of files "at random", leaving cloud copies.

rossb2 wrote:

-I ran a backup on my Mac, which failed to complete due to lack of drive space, on the backup drive.

You should check storage on the boot drive too. I bet you'll be surprised.

I was using my own wallpaper folder on the local drive. I realised to my surprise, that the local copy of the wallpaper has been removed, and now has a cloud icon with down arrow next to it.

Technically that's not a folder on the local drive. If iCloud is managing your Documents folder, that is an iCloud folder.

Numerous files have had local copies removed, and now appear to just be on icloud. This is shown in the screen shot. E.g numerous desktop files from the wallpaper folder at the bottom.

My question is, why would Monterey remove local copies of files, under its own logic? never seen this behaviour before. Is it trying to save disk space?

That's the way it works. It will do this to save disk space. It will also do it just because a file hasn't been modified recently.

If there are any files that shouldn't be evicted, then you should store them somewhere else in your home directory where iCloud can get to them.

There is a setting to force all iCloud files to be downloaded, but you should only enable that setting (or rather disable the "optimize iCloud" setting) if you have lots and lots of free disk storage.

This is expected. If you use iCloud Drive, older/larger/least used files are offloaded should space be needed on your Mac.