The duke now tells Sancho to prepare to take possession of his government. Sancho, however, is no longer so eager to have the office but finally agrees to take it "not out of covetousness . . . but merely to know what kind of thing it is to be a governor." Don Quixote takes Sancho aside to give him good instructions for his conduct in the discharge of his office. Solemnly the knight intones his advice: Sancho must be honest, compassionate in his judgments, mindful of relatives and friends, and, above all, must remember with pride and humility that he has sprung from peasants. His other injunctions remind Sancho to adjudicate with objectivity and never be tempted into corruption or vice.
Having advised his squire regarding mental and spiritual traits, Don Quixote now turns to directives for Sancho's physical condition. First of all is cleanliness, the master warns, and Sancho must pare his nails regularly and avoid eating onions and garlic so that his breath remains sweet. He must eat moderately and drink never so much as to get drunk. He must ride a horse with grace and wear trim, neat clothes. With many other injunctions, Don Quixote shows how his squire can discharge his duties as an exemplary governor. They then attend the duke and duchess at dinner.
The duke had ordered the management of Sancho's governorship to a clever steward, the same who had impersonated the Countess Trifaldi. As the steward prepares the equipage to accompany Sancho to his island, the squire notes that this man and Trifaldi "have the same face," but Don Quixote says, "Nonsense." After an exchange of tearful embraces, Sancho is ushered off to his new office, while a disconsolate Don Quixote retires to his chamber after dinner. His misery is complete when he tears his silk stocking the only pair he owns and has no matching thread for mending. Overhearing two ladies in the courtyard, the knight opens his window. One of the speakers, Altisidora, bitterly complains to her companion that she is so much in love with Don Quixote that she can hardly sing. Altisidora, knowing that the knight listens, tunes her lute and begins a mocking serenade of love, while the tenderhearted Quixote repeats his vows to serve the peerless Dulcinea del Toboso.
Entering the town of Baratano (on the Island of Barataria), Sancho and his equipage are welcomed by the whole town, each of whose thousand people is curious to see the new governor. After ridiculous pomp and ritual, Sancho sits in the seat of justice for, says the clever and facetious steward, it is an ancient custom to test each new governor by asking him "some difficult and intricate question." The first dispute Sancho experiences is between a farmer and a tailor. The tradesman says he agreed to make five caps out of the cloth provided by the peasant, but his customer refuses to pay or to accept the merchandise. The tailor shows Sancho the caps, which are so tiny that they fit on each finger of the hand. The verdict of the Court, says the governor, is that "the tailor shall lose his making, and the countryman his cloth, and the caps go to the poor prisoners." The next dispute is between a borrower who says he has returned the twelve crowns, and the lender, who says he did not. In order to swear on the Rod of Justice, the borrower asks his disputant to hold his cane while he makes his vow. The creditor is satisfied, but as the plaintiffs turn to leave, Sancho asks to see the cane. He breaks the stick in two, and twelve crowns drop from the hollow cane, while the borrower is overcome with shame and disgrace. The third test of Sancho's sagacity involves a hefty woman who says she has been raped by the hog driver who accompanies her. Sancho first orders the man to give her his entire purse and, when the wench has left, instructs the man to wrest the money from her. Worn out with scuffling, they both return, and the woman announces she still holds the purse. "Hark you, mistress," thunders Sancho, "Had you shown yourself as stout and valiant to defend your body as your purse, the strength of Hercules could not have forced you." Returning the money to the hog driver, he sends the wench out of the Court in disgrace. The scribe who has been ordered to record all of Sancho's words and actions for the duke is amazed anew at the squire's sagacity.
Don Quixote, while walking in the hall, meets Altisidora with her maid. The girl feigns a swoon, while the maid scolds all knights-errant who are so ungrateful as to reject pure love. Accompanying himself on a lute, Don Quixote composes a song which he sings from his window that evening. The lyric counsels maids to retain their modesty and virtue and tells of a heart and soul faithful forever to the "Divine Tobosan, fair Dulcinea." When the song is over, a rope hung with more than a hundred tinkling bells descends over the knight's window. Furthermore, a sack full of frightened cats is emptied, and the noise made by yawling cats and tinkling bells is frightening. Some cats find their way into the Don's room, and scrambling about, they put out the candles. The knight slashes with his sword at the necromancers who have invaded his privacy, and one cat attaches itself to his nose and is loosed only by great effort. The ducal couple regret their joke, for Don Quixote is forced to stay in his room for five days in order to recuperate.
Sancho now seats himself at a sumptuous dinner table set with delectable fruits and viands. Every time that a dish is placed in front of him, however, the watchful physician at his side motions it away. He tells Sancho that the fruit is too damp, the meat too seasoned, and suggests that the governor eat only some wafers with a bit of jam. Sancho is furious at the doctor, crying out that to shorten his victuals is to shorten his life, not prolong it. The terrified physician is about to slink from the room when the governor receives an urgent message from the duke. The note tells Sancho that some enemies intend to attack his land and that spies have already been sent out to murder him.
As Don Quixote lies in his chamber that night, out of temper because of his cat-scratched nose, the duchess' waiting-woman Rodriguez enters. Asking for succor, she proceeds to narrate the story of her life, detailing the death of her husband and the problems of her sixteen-year-old daughter. The son of a rich farmer, a vassal of the duke who lends him money, has closely courted the child. Offering marriage, the young man seduced the daughter and now refuses to make good his promise. At this point, Donna Rodriguez, as with most aging gouvernantes, relates some gossip. She speaks of Altisidora's strong breath and says that the duchess has open sores on each leg which drain the ill humours from her body. Suddenly someone grabs the waiting-woman, spanks her with a slipper, and pulls her out of the room. Don Quixote gets thoroughly pinched, and when the silent phantoms vanish, he can only wonder who this new enchanter is.
Again Sancho has three experiences which try his abilities as governor. Accompanied by the steward and other attendants as he walks the rounds of his island, he stops two men fighting and demands to know the cause. One tells him that he is a "gentleman in decay," brought up to no useful employment. Frequenting gaming tables, he advises gamblers how to play and earns his living by receiving tips for his service. This gambler, he says, after winning a large sum of money, has given him merely a pittance. Sancho, after ordering the gambler to give the man 100 reals, banishes the parasite from the island. The watchman now brings a suspicious young man to the governor for questioning, but Sancho's queries receive impertinent, but witty, answers. Instead of punishing him, Sancho sends the young wag good humoredly to his home. The third encounter deals with a young girl, dressed in boy's clothing, and her brother. The charming maiden tells the governor that she has been so closely kept at home that she has conceived a great longing to see the world. Dismissing both youngsters, Sancho advises the maiden to act more prudently and with less curiosity in the future. "An honest maid," he says, "Should be still at home as if she had one leg broken."
It seems that the roommate of Donna Rodriguez, a fellow waiting-woman, followed her colleague down the hall and saw the duenna enter the bedchamber of Don Quixote. Quickly rousing the duchess and Altisidora, the three ladies listened outside the chamber door and became very angry to overhear the secrets disclosed about themselves. They took revenge by mauling and pinching. The duchess diverts her husband, the duke, with this story, and then sends the clever page who impersonated Dulcinea to deliver Sancho's letter to his wife. Enclosing a friendly note of her own, the duchess also sends along Sancho's green hunting suit and a costly coral necklace. When they receive the gifts, Teresa Panza and her daughter are so delighted that they tell the entire village of their good fortune. The curate, the barber and Samson Carrasco can scarcely believe the tale of Sancho's government, but the page assures them it is true. Teresa now writes a letter, with the help of a scribe, to the duchess, and one to her husband.
Hard work and scanty diet make Sancho sick of being a governor. One problem he solves as he sits in judgment is a classic paradox: there is an ancient law regarding the crossing of a bridge. If a man swears he tells the truth, he is allowed to pass, but if he lies, then he is to be hanged on the gallows. This time, the man in question tells the judges that his only object in crossing is to die on the gallows, but since he tells the truth he cannot be hanged, yet if he does not die, the statement is a lie. Sancho orders that the man be passed freely, for he says, as Don Quixote has always said, "When justice is in doubt, lean on the side of mercy." The duke's steward is truly impressed by Sancho's wise decision. Now the governor reads a letter from Don Quixote in which his master has advised him to protect the poor, to protect the consumers, and establish laws wise, just, and merciful. Immediately Sancho dictates a comical, but sincere, reply. The rest of the governor's busy day is taken up with making excellent regulations, in accord with the knight's counsels, that to this day, writes the author, they are promulgated and called "the Constitutions of the Great Governor Sancho Panza."