If the vendor is free to set the conversation rate, and it is generally acknowledged that the value of the Papiermark is falling, they will require more of it f

If the vendor is free to set the conversation rate, and it is generally acknowledged that the value of the Papiermark is falling, they will require more of it for the equivalent of a dollar. The aggregate effect of everyone doing this may inflate the Papiermark out of existence, but it has nothing to do with Gresham's law. In fact, it's the opposite effect, since the dollar would remain in circulation. If the vendor had to accept the Papiermark at a 1:1 rate, then nobody would pay with the dollar and then it would drive out the dollar. That would be Gresham's law.