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The order for Taggart rail is the first failure in the history of Rearden Steel. Without the copper, there is nothing Rearden can do, and without the metal, Taggart cannot fix its crumbling mainline track. There are more accidents, and shippers who cannot get goods through go out of business. The economy spirals quickly downward.
Colorado has become destitute, and virtually no businesses remain on the Rio Norte Line. At a board meeting, Dagny is forced to close the line and use the Rearden Metal to repair the worst problems on the main line. A representative from Washington tells Jim that in order to get the permits he needs, he will have to offer Wesley Mouch something. As she leaves the meeting, Dagny finds Francisco D’Anconia waiting for her. He asks her how long she is willing to continue working for people who do not deserve her. She tells him that whatever the cost, she cannot abandon the railroad.
Jim Taggart finds himself pulled in different directions by the politicians and looters, and must find something valuable to use to curry favor. The government wants no trouble from Rearden when they announce another new law, so Jim seeks information about Rearden that might help. He asks Lillian Rearden to dinner. She agrees to help. After some investigation, Lillian discovers that Dagny is Rearden’s mistress. When she confronts him, Rearden refuses to end the affair, saying he would sooner see Lillian dead.
Wesley Mouch, Jim Taggart, Orren Boyle, Dr. Floyd Ferris, Mr. Weatherby, Fred Kinnan (head of the Amalgamated Labor of America), and Mr. Thompson (the Head of State) meet to discuss Directive 10-289. This set of laws is designed to freeze the economy in its present state and prevent further decline. Although they fear the public’s response, they vote to enact the laws.
According to the directive, workers must remain in their present jobs or face prison, and all businesses must remain in operation. All patents and copyrights must be turned over to the government by means of voluntary Gift Certificates. No new devices, inventions, or products can be produced. Every company is required to produce the same amount of goods as the previous year, no more and no less. Wages and prices are to be frozen, and every citizen is required to spend the same amount of money as in the previous year. All research departments must close except for the State Science Institute. To oversee the law, the Bureau of Economic Planning appoints a Unification Board, whose rulings are final.
Dr. Ferris notes that Hank Rearden will fight them for his patent, but Jim assures Mouch that he can control Rearden in exchange for Mouch’s raising his freight rates before the directive freezes all prices.