Though there are varying views on the present health of America’s economy, the Federal Reserve has been fairly consistent with its contention that a slowdown would help it and the consumer by keeping pricing pressures at bay.

While Federal Reserve Chairman Bernanke cited the weak dollar and commodities as inflation indicators in his latest speech, he reiterated his oft-stated view that too much growth can lead to higher prices, so the Fed must “guide the economy toward sustainable growth without inflation.”

In making the above statement Mr. Bernanke is suggesting to the extent that the Fed can engineer slightly higher unemployment and what he terms lower “resource utilization,” this will reveal itself through a fall in the prices of consumer goods.

Seeking to move inventories less attractive to more careful consumers, businesses will lower prices on all products such that government measures of inflation will be more quiescent. So while a less vibrant economy would hurt workers and businesses of all stripes, the silver lining within would be a lower level of inflation. The Fed’s demand-side inflation model makes sense at first glance, but looked at more critically, its assumptions prove wanting. Forgotten here is that supply is by definition demand, and as economic actors trade products for products, lower levels of economic growth will very certainly reduce the amount of supply in the American economy.

For consumer prices, what this means is that a slowing economy will show up in the form of lower work output and lower production. Flagging demand for consumer goods will be met by less supply; meaning the impact on the broad price level will be zero. Say’s Law holds true.

Importantly, empirical evidence suggests that economic slowdowns correlate far more with rising, rather than falling prices. Between 1965 and 1982, America’s economy experienced no less than four recessions, but the time in question is far more notable as an inflationary era as opposed to a period when prices fell.

Indeed, as the 1960s drew to a close, investors increasingly questioned America’s commitment to the dollar, and inflation crept into the economic picture. With the Bretton Woods system of fixed exchange rates tenuous at best, CPI inflation hit 4.7% by December of 1968. When President Nixon completely severed the dollar/gold link over two years later, the inflationary floodgates opened.

By the end of the recession-riddled 1970s inflation was hardly tame given record highs in the price of gold, while the federal government’s CPI measure had risen all the way to 13.3%. Far from putting a damper on pricing pressures, the economic malaise of three decades past led to a big drop in dollar demand, and occurred in lockstep with skyrocketing prices. Inflation, as it has always been, was monetary in nature.

Conversely, the 1980s ushered in tax cuts and further deregulation which stimulated the very economic growth that served to soak up the excess liquidity created in the 1970s. Ironically enough, despite the fact that growth in the Fed’s monetary base in the 1970s mirrored base growth in the 1980s, the dollar strengthened as a strong economy and a renewed commitment to sound money killed off inflationary pressures.

Two decades of economic growth (interrupted by a relatively shallow recession in the early 1990s) ensued, and inflation, contrary to the Fed’s model, became virtually non-existent. Gold fell to a modern, arguably deflationary low of $250/ ounce, and CPI inflation was well below the double-digit territory experienced in the 1970s; hitting 2.7% by the end of the millennium.

What the experience of the 1970s tells us is that a slower economy will, in isolation, do nothing to reduce inflationary pressures. But, as evidenced by the power of a weak, inflationary dollar to induce recessions, reversal of our weak-dollar policy will bolster what many deem a faltering economy today.

With the dollar presently down against all manner of foreign currencies, and gold at record highs once again, the Fed needs to act in order to avoid a replay of the 1970s. It should float the fed funds rate, all the while targeting a lower price of gold. Importantly, the introduction of a market-price rule would likely force the Fed to increase, rather than decrease dollar liquidity so that there would be great demand for a credible greenback.

Rather than count on economic weakness to solve what is a monetary problem, the Fed needs to look inward and not just arrest the dollar’s fall, but also strengthen it. The latter will solve the inflation problem, all the while sparking a resuscitation of economic spirits.

Mr. Tamny, the editor of RealClearMarkets, is a senior economist for H.C. Wainwright Economics. He can be reached at jtamny@realclearmarkets.com.