At first, the animals are devastated. But after Squealer and the pigs work their magic, the animals forget and even begin to celebrate.
This is the second time they have built the windmill. It was first lost in a storm. Napoleon is counting on the money from wood he has sold to Frederick, but Frederick gives him fake bank notes, essentially stealing the wood. The money was to be for the machinery in the windmill. Then Frederick and his men attack and destroy the windmill. Napoleon asks Pilkington for help in fighting them off but Pilkington refuses. Although they are able to drive Frederick and his men away, this is a devastating defeat. (In the historical parallel, the Animals/Russians are able to drive off the Humans/Germans, but they suffer much destruction and many casualties.)
However, Squealer turns this pyrrhic victory into a grand victory. Squealer is an artist of propaganda. When the commandments need changed to suit the pigs' newest desires, he makes subtle changes so that the animals might not know the difference. He is able to spin arguments around to suit the pigs' latest agenda. And he does this with the Battle of the Windmill as well. The losses are great. The loss of the windmill is huge because it took so long to build and because it was the second time building it. Boxer is incredulous when Squealer proclaims it a victory. But as he and the other pigs celebrate, the weary animals come to believe that it actually has been a victory. Such is the power of propaganda. Even the theft of the wood is forgotten.
Two whole days were given over to celebrations. There were songs, speeches, and more firing of the gun, and a special gift of an apple was bestowed on every animal, with two ounces of corn for each bird and three biscuits for each dog. It was announced that the battle would be called the Battle of the Windmill, and that Napoleon had created a new decoration, the Order of the Green Banner, which he had conferred upon himself. In the general rejoicings the unfortunate affair of the banknotes was forgotten.