Gresham’s Law is often stated: bad money drives out good. This is incomplete, and an incomplete statement of Gresham’s Law. It is more accurately stated: Bad money drives out good if their exchange rate is set by law.
If different “money” is free to trade, without any hindrance from legal tender laws, tax preferences, etc., bad money will not drive out good, nor necessarily will good money drive out bad. Different “monies” will find their value in the market, and will trade. Period.However, if one money is protected by legal tender, and the valuation is fixed by government, then yes, the bad money will drive out the good. All will get rid of the over-valued (by government decree) money, as it MUST be accepted by the counter-party, and accepted at a value higher than the market would determine.
This is how it works. Up until 1965, the US 25 cent piece, a “quarter” was 90% silver. The metal content of the quarter was more than 25 cents and the US Mint was losing money making them. So, the marvelous Battelle Memorial Institute came up with the sandwich quarter made of copper and nickel, which has been in circulation since. Since both coins are valued by law as having a value of 25 cents, people who are smarter than the decrees of the feddle gummint keep the silver coins and use the sandwich quarter for purchases. (Perhaps you ask why the the US Mint didn’t just continue making the silver quarter and sell them to the public at market value and not legal tender/face value? Well, because then the counterfeiting/money debasement operation of the Feddle Reserve, in full swing since the beginning <1913> would be obvious to everyone. We can’t have that. <sarc>)
We have actually seen this in practice.
Consider when nuclear baseload is producing electricity and the wind starts blowing. By law, the utility companies have to buy this power, sometimes at retail rates when it is produced. Since the baseload can’t be throttled in an instant, (that’s why it’s called baseload.) the excess electricity has to go somewhere, which means that sometimes the utilities have to pay someone to use the electricity.
This undervalues nuclear baseload generation and overvalues unreliable and unpredictable wind and solar. The results are as predictable as with silver and sandwich coins. The silver coins go into hoards and the sandwich coins circulate widely. In the case of nuclear, fewer, if any plants are built, others are closed while more and more wind and solar are installed. (Tell me that this was not the plan in the first place.) The result is increasing electricity costs and more outages.