The palace is buzzing with excitement because it’s practically time for the Grand Coronation of Emperor Marcus the Third. William, the Royal Advisor, and Deena, the Royal Clothes maker, are confident that nothing will go wrong, despite the fact that their new ruler is only fourteen years old. But Marcus wants to cancel the coronation because he’s not ready yet—he’s only read the first chapter of How To Be a Better Emperor. Studying portraits of his ancestors, Marcus wonders aloud to Arno, the Royal Scrub Boy, whether or not different clothes could help him at least look more mighty.

William reminds Marcus of the first rule for being an Emperor: he must keep up appearances. That’s just what Marcus has in mind when he orders Deena to create a whole new wardrobe for him, which the Villagers all agree makes him look ridiculous. They’re upset because the young Emperor seems to be much more concerned about displaying his outlandish new outfits than about fixing the holes in the road or stopping the river from overflowing.

Enter the Swindler, a fast-talking rascal who sees his chance to pull a fast one on the entire kingdom. The Swindler offers to sell magical clothes that he claims cannot be seen by liars or fools or anyone who should be ignored. Convinced that this charming stranger has the solution to his problem, Marcus orders his staff to give the Swindler anything he wants. William and Deena obey, but inside they’re worried that these so-called "magic" clothes might mean big trouble.

Marcus runs into Arno in the garden, and despite the differences in their status, the two boys start to become friends. In the meantime, the Swindler has William and Deena running in circles trying to satisfy his ridiculously greedy demands. All the while, Marcus tries to avoid his angry subjects while anxiously waiting for the Swindler to make good on his promise. In desparation, he turns to the only person he can relate to, Arno.

When the Emperor’s magic clothes finally arrive, no one can see them, but William and Deena pretend they can in order not to appear foolish. They even allow the Emperor to lead the parade wearing nothing but his royal undies. Only Arno has the courage to tell the Emperor that he isn’t wearing any clothes. As a reward for the young boy’s honesty and friendship, Marcus promotes Arno to Royal Truthsayer and takes the Swindler for his new Scrub Boy.