The Mexican government has discovered, upon nationalizing Francisco d’Anconia’s San Sebastian mines, that the mines are completely worthless. Dagny is furious. On her way to confront Francisco, she remembers the way he used to be. His summer visits were the highlight of her childhood, as they played together and dreamed of taking over their families’ businesses. Later, they had become lovers. But the affair ended ten years ago when Francisco left her. Leaving was torture for him, but he said he had no choice and warned her not to ask any questions. He said that he would do things that soon would make her denounce him, and she has. Over the next few years, Francisco became the most notorious playboy in the world, squandering his fortune on foolishness.
Dagny confronts Francisco. She asks him why he deliberately invested in worthless mines and ruined the fortunes of his stockholders, among them James Taggart. She tells him that he should be fighting hardest against the looters of the world. He responds that in fact he is fighting against her and her railroad. She is horrified. She asks him what he is trying to do, and why, but he tells her that she is not ready to hear it. She does not have enough courage yet.
Lillian Rearden throws a party to celebrate her wedding anniversary. Hank Rearden agrees to attend out of a sense of duty, though he dreads it. He would rather be working to find a replacement for the recently resigned superintendent of one of his mills. Dagny also attends. Although she feels there is much to celebrate in the progress of the Colorado track, Rearden is unexpectedly cold toward her.
The party guests are writers, intellectuals, and other important figures in society. Their conversations suggest the futility of the times. Dr. Pritchett argues that man is nothing but a collection of chemicals, with only instinct as his guide. Balph Eubank contends that true literature is about suffering and defeat, because it is impossible to be happy. The only thing one can live for is “brother-love.” The intellectuals agree that need is the only valid consideration, that whatever is good for society is right.
Francisco d’Anconia enters the party. Rearden asks Lillian to keep Francisco away from him. Jim Taggart pulls d’Anconia aside to confront him about the San Sebastian mines. Francisco responds that he only did what the entire world is now preaching. He hired men not because they were competent, but because they needed the work. He did not work for profit, but took a loss. Everyone criticizes industrialists for their domineering nature, so he simply let his underlings control the venture. Jim is helpless and furious.
After some time, Francisco approaches Rearden and tells him that he came to the party simply because he wanted to meet him. He approaches him with such sincerity that Rearden finds himself listening. Francisco’s message is mysterious, but Rearden is drawn to it. He asks why Rearden carries so many people, why he is willing to work and let others feed off his energy. Rearden responds that it is because they are weak and that he does not mind the burden. Francisco corrects him and tells him the others are not weak; they have his own guilt as a weapon against him. A woman at the party professes to know the identity of John Galt. She says Galt was a millionaire who discovered Atlantis. Dagny does not believe the story, but Francisco steps in and announces that he does.
Dagny admires Lillian’s bracelet made of Rearden Metal. When Lillian mockingly complains that she would gladly exchange it for diamonds, Dagny offers her own diamond bracelet, which Lillian is forced to accept. Rearden watches, visibly shaken, but stands by his wife, coldly telling Dagny that her action was not necessary.
The mystery of Francisco deepens as readers learn what he has done. By deliberately investing in worthless mines, he has destroyed his own fortune. What could possibly have motivated him? Dagny’s memory of their affair reveals him to be even more complicated. Clearly, he loved her very much, yet he chose to leave her and pursue a worthless existence, seemingly against his own desires. The question of why he left her and why he is working to destroy her railroad along with his mines is at the heart of the novel. But neither Dagny nor the reader is ready to know the answers just yet.
Lillian’s party guests demonstrate the cynical and hopeless state of the culture. Intellectuals speak aimlessly of the futility of thought, the death of reason, and the supremacy of need. When Francisco tells Jim his mismanagement of the mines was merely putting society’s vague words into action, he begins to demonstrate the absurdity involved in the practical application of socialist ideas. But Jim does not hear him or understand the absurdity. He is too focused on his own losses. Francisco has put the conventional morality into action, with disastrous effect. His comments foreshadow the absurdity to come, as lawmakers create policies that are contradictory and illogical, then wonder at their failure.
The party also serves to bring Francisco and Rearden together. The dignity Francisco shows in approaching Rearden disarms him and makes him open to the strange message Francisco bears. Francisco’s respectful tone is even more surprising and unexpected, given his playboy reputation. This conversation marks the beginning of Rearden’s transformation as he struggles to overcome his dual nature. As Francisco points out, Rearden is an uncompromising egoist who happily follows his own rational self-interest in his work. But in his personal life, he allows others to dictate his morality and accepts condemnation from a family that leeches off of him, offering him no value in exchange. When Francisco points out this duality, Rearden begins to close the gap between his two selves. But he still does not understand why Francisco has told him all this.
Rand uses the bracelet incident to create important contrasts between Dagny and Lillian. Dagny’s love for the bracelet demonstrates that she understands what is important to Rearden and that the same things are important to her. Lillian, on the other hand, hates the bracelet and wears it only to mock Rearden. She does not understand or care for him at all. Although he despises Lillian, Rearden is trapped in an imposed morality and feels compelled to stand by his wife. He assumes that his inability to understand her must be a failure within himself. Although Rearden understands how much he and Dagny have in common and is attracted to her, he treats her coldly in an attempt to resist the attraction and remain loyal to his mocking wife.
The mystery of John Galt continues to grow as the guests discuss the rumor that he discovered the legendary Atlantis, a paradise on Earth. Francisco’s insistence that the story is true creates a possible link between his own mysterious secrets and the answer to the question “Who is John Galt?”