Moodie says the events of his story take place 25 years earlier and the story involves a man Moodie calls Fauntleroy. Fauntleroy is conceited, shallow, materialistic, and very wealthy. He only loves his wife and daughter for their beauty, which reflects well on him. After a few years of excessive spending Fauntleroy realizes he’s about to lose everything to debt collectors and he gets caught conspiring to commit a crime to avoid financial ruin. Fauntleroy has to flee, his wife dies of shame, and his daughter is left in his brother’s care. Fauntleroy settles in dirty city lodgings under a new name. For a while his family sends him a small allowance to keep him out of trouble, but his deep shame in himself and his desire not to be seen is what really keeps him out of trouble.
Fauntleroy is actually Moodie, although this may not actually be his original name. The first indication of this is that Fauntleroy, like Moodie, uses shadows and doorways to simultaneously move through society and keep himself out of sight. Also like Moodie, Fauntleroy lives in poverty in the city, trying to keep his present separate from his past.
Fauntleroy marries a seamstress who gives birth to his second daughter but dies shortly thereafter. Fauntleroy’s second daughter is pale and nervous, but affectionate. Fauntleroy tells Priscilla stories about her beautiful, wealthy half-sister instead of fairy tales until she grows to love the idea of her sister above all things. This love helps keep Priscilla from succumbing to the despair that surrounds her. Priscilla’s nervousness, overactive imagination, and pallid features earn her a reputation as a “ghost-child” among the people who live in the building. This reputation spreads and people tease Moodie, as he’s now called, about his clairvoyant daughter. A mysterious but strikingly handsome man with a gold bar on his teeth starts visiting Priscilla. People don’t suspect a scandal (Priscilla is too homely to be an object of lust), but they believe the man is a wizard with nefarious plans. Still, nobody quite understands his relationship with Priscilla.
This passage confirms that Moodie is Priscilla’s father. Fauntleroy fills Priscilla’s head with stories about her beautiful sister and all the wealth she enjoys, which highlights that Fauntleroy himself still loves wealth and misses his former lifestyle even though trying to maintain it cost him so much. The man with the gold teeth that comes to visit is evidently Westervelt (the gold bar on his teeth is one of his defining traits; Coverdale saw it when he met Westervelt in Blithedale). In this case, Priscilla’s homeliness is a type of protection—Westervelt doesn’t want to take sexual advantage of her, he just wants to exploit her quirks and oddities to make money (this will be seen later when Priscilla reveals that she’s the Veiled Lady).
Meanwhile, Fauntleroy’s first daughter grows up in wealth and luxury with Fauntleroy’s brother. Without a mother’s influence, the young girl is largely left to form her own character as a child. She is naturally passionate and self-willed, but also generous and kind. Zenobia’s uncle dies while she’s still young and she inherits his wealth. After this, her history is somewhat obscure. Rumors swirl about an attachment or marriage to an unprincipled but fascinating young man, but they disappear over time. The rumors don’t ruin her reputation—she’s so admired that most people assume that whatever she does is right without criticizing her very much. Most people believe the typical women’s sphere is too narrow for Zenobia and they accept her choices. For inexplicable reasons, Zenobia chose to join Blithedale and Priscilla—who, at the time, was in a mysterious bondage—found out and followed her there.
Zenobia’s wealth and independence are what save her from having to follow all of the same societal rules as most women. People must accept Zenobia’s quirks because she’s an heiress and therefore she can support herself; if she needed a man to support her financially, then she would likely have to conform to social norms to make herself marriageable. In fact, being wealthy makes her an object of desire for men who want to marry for money. So, in Zenobia’s case, her wealth allows her to compromise her reputation without fear; in Priscilla’s case, her poverty and lack of beauty protect her from rumors about her reputation. Otherwise, both of them might have been ruined by the rumors that float around about them.
A few months after Priscilla’s departure, Zenobia goes to Fauntleroy’s rooms. Coverdale doesn’t know the details of their conversation, but he presents what he believes passed between them. Zenobia believes the man needs her charity, but he tells her not to give him money. Instead, he asks to be allowed to look at her. Fauntleroy tells her to keep her wealth, but with one condition—she must be no less than a sister to Priscilla. Zenobia leaves and Fauntleroy is glad that his former self still lives in Zenobia, who enjoys all his wealth without any of his shame. Still, he wonders if he’s right to give up his wealth to Zenobia while Priscilla goes without. Fauntleroy decides wealth is useless to Priscilla, but he hopes Zenobia knows better than to hurt her. Little does he know, that very night Priscilla is either snatched away or Zenobia throws her away.
Fauntleroy’s comment to Zenobia that she must be like a sister to Priscilla if she wants to keep her wealth is both a threat and a revelation. Because Zenobia’s uncle has died, Fauntleroy actually has a superior legal claim on his wealth (Zenobia’s inheritance) than she does. If she’s not nice to Priscilla, Fauntleroy can rightfully claim the money (although Zenobia might not quire realize this in the moment). The threat also reveals that the two are sisters. This makes it look extra suspicious that, on this same night, Priscilla seems to disappear. Or, as Coverdale notes, Zenobia might have thrown her away to protect both her relationship with Hollingsworth and her wealth.