It is the morning after the Masquerade. Soberly dressed and kneeling before the Emperor and his courtiers are Faust and Mephistopheles, the former begging forgiveness for disguising himself as Plutus and creating the fiery illusion of the night before. The Emperor says he was awed by it, and welcomes many more such entertainments. The devil tells the Emperor that he now has proof that fire is his servant, and he promises him mastery over the seas and air as well. The Emperor is grateful to have such entertainers at his command who can help him escape from this routine world.
The Emperor is so eager for pleasure that he ignores the fact that Faust’s fiery spectacle threw his own subjects into panic. This anticipates the point at which the Emperor becomes so pleasure-seeking that he ignores his duties, which leads to bloody rebellion in his realm. The devil reinforces his and Faust’s control over the Emperor with flattery and the false promise of mastery. A good ruler, Goethe implies, needs to be content with the routine world.
The steward enters and tells the Emperor joyous news: all the empire’s debts are settled. The high-ranking military official follows and announces that the army is disciplined once more. The treasurer says that Faust and Mephistopheles are to thank for these happy turns of events.
Faust has solved the empire’s problems by inventing and circulating paper money, the foundation of our own economy. But in the play this invention causes more problems than it solves.
The Chancellor explains: Faust and Mephistopheles came up with the idea of having paper money printed on notes. The Emperor fears fraud, and wonders who forged his signature on the original of these notes. The Chancellor explains that the Emperor signed it himself the night before, and that conjurors made copies of the notes in the thousands, to the unprecedented pleasure of the imperial subjects. The Emperor finds the idea of paper money strange, but accepts it.
It is ironic that the Emperor does not even remember signing the original banknote. He makes crucial decisions for his realm while drunk, a clear sign of his inability to rule his people well. Characteristically, the Emperor accepts a short-term solution to a problem so long as it leads to pleasure now.
Faust and Mephistopheles go on to explain that everyone accepts these new banknotes, and that they’re substantiated by the unimaginable wealth buried in the soils of the empire. The Emperor is persuaded. He thanks the magician and the devil for their service, and appoints them masters of the treasury. The Emperor then grants gifts to his officials and courtiers. His fool enters, apparently resurrected, and is at first distressed but soon charmed by the idea of paper money. He says he will dream of his estates that night. Everyone exits except the devil, who says that now none can doubt that the fool has wit.
Mephistopheles needed to introduce the idea of hidden gold earlier so that he and Faust can pretend here that the paper money has real-world value (gold to back it up), which it doesn’t. Without even knowing whom Faust and the devil are, the Emperor gives them a high-ranking position in his court. This kind of impulsive, decision-making is typical of how the Emperor governs. Instead of being prudent with their newfound wealth, the Emperor and fool can’t spend it fast enough.