The Yankee pays the peasants for breakfast, and he and Sandy continue on their way.
The peasants give the Yankee some flint and steel to let him light his pipe, and then they run into the forest when they see the pipe smoke rising through his helmet.
The Yankee assures them that the smoke will cause them no harm, and claims that it will only hurt them if they stay behind in the woods.
The ruse is enough to keep Sandy quiet.
They continue on, and eventually come across seven knights on horseback who, like all noble and virtuous warriors, immediately attack.
The Yankee waits until they get close, then lets loose a blast of smoke from his pipe. They run in fear, only to stop several hundred yards away.
Sandy believes that Hank has vanquished their foes, though the Yankee is afraid it didn't work and claims his "magic" wasn't performed properly.
Sandy tells him that they're only waiting to yield to him, and goes to them to deliver terms of surrender. They must travel to Camelot and give themselves to Arthur: knights under the Yankee's command henceforth. (He ought to start collecting them like baseball cards.)