Gresham’s Law is frequently oversimplified as “bad money drives good money out of circulation.” This phenomenon has been observed in history whenever debasement of coins has occurred. In such cases, people choose to collect coins with the greater precious metal content and spend the debased coins. Over time, the ‘good’ money, the coins with more precious metal in them, get driven out of circulation by ‘bad’ money, the debased coins.

Murray Rothbard issues a clarification in What Has Government Done To Our Money?. Gresham’s Law actually means Money overvalued artificially by government will drive out of circulation artificially undervalued money.

In a free market for money, coins with lower precious metal content would be valued lower than coins with higher precious metal content. With appropriate valuation, the incentive to take the more precious coins out of circulation would be negated and ‘bad’ money would not be able to drive out the ‘good’ from circulation.

Only when a government enjoys a monopoly over coinage can it coerce the population to pretend that two coins with distinct values are alike. Nevertheless, reason prevails: economic actors take the artificially undervalued coins out of circulation, and put them to other uses, perhaps illicit, but certainly more rational.