The Yankee decides to turn his influence in the valley to some profit. He finds the monks eager to wash but afraid of offending God again and causing the water to stop flowing. He tells the abbot that he has discovered the water stopped the first time years ago because of another type of sin altogether, and that bathing was not at fault. He refurbishes the ancient bath, and the abbot is the first to bathe in it. The other monks joyously follow suit. After recovering from an attack of rheumatism, the Yankee goes out walking and finds a telephone office set up in an abandoned hermit's cave. The agent there connects him with Camelot, and Clarence tells him Arthur is on his way to the valley to see the restored fountain with two candidates for lieutenancy from his newly established standing army.
The Yankee is dismayed that the king has acted on his advice without him there to oversee it and has chosen all the officers for the first regiment from the nobility instead of from his West Point military academy. Clarence connects the Yankee with his West Point military academy, and he orders the superintendent of the academy to come out and meet him. He goes back to the monastery and finds the monks watching a performance of a new magician, reportedly from Asia, who astonishes everyone by telling them what various people around the world are doing at the moment. The Yankee feels threatened and offers the magician two hundred silver pennies to tell him what he himself is doing with his right hand behind his back. The magician is stumped, and the Yankee declares him a fraud.
The monks are frightened the magician will react violently. He responds that his art does not concern itself with the lowborn and offers to tell what Arthur is doing at the moment. He says the king is currently lying asleep in his palace after a day of hunting, to the satisfaction of all the monks. The Yankee contradicts him, saying the king rides, and the monks are confused as to which to believe. The Yankee asks where the king and queen will be in two days' time, and the enchanter says they will be far north of Camelot on a journey that will then be half done. The Yankee declares this another lie and says they will instead be in there with them in the Valley of Holiness. He proclaims that if he is incorrect, he will have himself ridden out on a rail, but if he is correct, he will have the magician ridden out on a rail.
He follows the king's progress by telephone, but no preparations are made by the monks to meet the king, as the magician has declared he and the queen have decided to stay at home. When the king rides into the valley, the abbot hurriedly sends out his monks to meet him and has the magician ridden out with them on a rail. The king brings with him a part of his administration and holds court while he is in the valley. He is a wise and humane judge, but he unconsciously favors the well-born over the lower classes.
The Yankee meets with the king's officer examination board, made up of incompetent priests. He brings in one of his West Point cadets, but they refuse to examine him because he is a commoner. The Yankee appeals to the king to let two of his West Point professors handle the examinations. The West Point candidate dazzles the king and his board with his knowledge of the science of war and a discussion of modern artillery and tactics, much to the Yankee's satisfaction. The next two candidates are nobles who cannot read or write; the Yankee and his professors confuse them with their questions. The original examination board steps in again and awards the lieutenancy to one of the nobles, the great-grandson of a king's leman; they inform the Yankee that four generations of nobility are required to hold an officer's position.
The Yankee has a private audience with the king and suggests that they continue as the king has started and officer this first regiment of the army entirely with nobles and increase the number of officers to accommodate all the nobles who wish to be in the army. This regiment would have the freedom to act as it chose. The other regiments would be officered with commoners chosen solely for their effectiveness and would bear the brunt of military duty. The king happily agrees. The Yankee hits on the idea of making the regiment up entirely of officers, the lower ranks filled by nobles who serve without pay and at their own expense, and the higher ranks filled by Arthur's many royal relatives, who would be paid a good salary and given an impressive title in return for renouncing their royal grants.