Emil Sinclair begins his narration by telling the reader that he will recount an event in his life that took place when he was ten years old. First, he pauses to tell of the two realms, two worlds of which he was aware at the time—one of darkness, and one of light, one of day and one of night. The realm of day was everything "good", straight, and Christian. The realm of night was the world of scandal and mystery, drunkenness and murder, deceit and illegal activity. The realm of light was the world of Sinclair's parents and sisters. Though living in the realm of light, he was curious about and attracted to the realm of darkness.
One day Sinclair was hanging out with some of the neighborhood locals, including the large and commanding Franz Kromer. The boys were laughing it up, trying to one-up each other in talking of misdeeds they had done. Pressured by the boys' chatter, Sinclair invents an intricate story about having stolen a sack of apples from an orchard near the mill. Kromer badgers Sinclair, making him swear to God that the story is true. As the boys are dispersing, Kromer pulls Sinclair aside. Kromer tells Sinclair that he has known about the apple robbery for quite a while and, further, that the owner of the orchard has offered a reward of two marks to anyone who can tell him who stole the apples. Kromer then tells Sinclair that he needs the money and would, of course, rather just get the money from Sinclair and not turn him in. If Sinclair brings him two marks the following day, Kromer will agree not to tattle on him. Sinclair protests that he does not have such money, but Kromer will hear nothing of it. They agree to meet in the market the following day after school.
Sinclair returns home a changed boy. He chastises himself for having been so influenced by Kromer and is certain that this act of deception will lead him to innumerably further misdeeds. He feels like an outsider in his own home. He ponders whether he should confess to his father, but decides against it. His father chastises him for having muddy shoes and this allows Sinclair to fulfill his need to feel punished. At the same time, this is where he first comes to see himself as better than his father—here he was, virtually a hardened criminal, and his father was scolding him for muddy boots!
Sinclair falls ill the next day and is afforded the opportunity to stay home in the morning. Knowing he must meet Kromer at eleven, he decides to crack open a piggy bank his mother keeps for him. He discovers in it sixty-five pfennigs and decides to bring these to Kromer, reasoning that it will be better than showing up with nothing. Kromer angrily accepts the payment, telling Sinclair that he will wait for the remaining mark and thirty-five pfennigs. In the weeks that follow, Sinclair, unable to pay his debt is forced to perform humiliating tasks for Kromer.
Sinclair's discussion of the two realms and of his conundrum concerning Kromer, sets the stage for the entire work. The dichotomy between good and evil reappears constantly. It plays a central role in Sinclair's struggles as an adolescent and is manifested in the forgotten god, whom Sinclair rediscovers and seeks out, Abraxas (see Chapters 5 and 6). In introducing the struggle between the two realms at the beginning, Hesse provides a unifying frame through which the entire work can be read. Further, he is showing us that the young Sinclair's problems started when he was still a child. This is innovative, portraying a deep internal conflict not as something that comes only in later adolescence or early adulthood, but as something that can torment even a young child.
In giving the background to Sinclair's day gallivanting with Kromer and other neighborhood children, Sinclair presents a dichotomy between the upstanding children with whom he attended the Latin School and those who attended the public school. He comments that he and his chums "usually looked down" at those who were less fortunate. This presents an irony, where the children who are supposed to inhabit the world of light are engaged in a morally dubious activity—looking down on the public school children simply because of their lower class status.
The episode involving Sinclair's invention of the story about stealing the apples and Kromer's subsequent blackmailing of him presents both the dark and light sides of Sinclair. On the one hand, Sinclair wants to fit in with and impress a crowd that inhabits the world of darkness—he wants them to think that he has stolen. Yet, having grown up in the world of light, Sinclair is still very naïve—he does not realize that Kromer's threat to turn him in is empty. Sinclair did not really steal any apples, but he is too innocent to act on this fact.
Religious imagery pervades this chapter. In returning home after being blackmailed by Kromer, Sinclair ponders confessing to his father. This is meant to evoke not simply Sinclair's earthly father, but also his "heavenly father," the Christian God. Further woven through this section is the image of the Prodigal son. Sinclair fancies himself a sort of Prodigal son, having gone out and done wrong. Yet, he, unlike the Prodigal son of the Christian tradition, does not return and repent his sins. In choosing not to confess, then, Sinclair is fulfilling a desire he expresses early on in the chapter—"at times I didn't want the Prodigal son to repent."
Like many writings of the early twentieth century, Demian shows that it has been deeply influenced by psychoanalysis. First, Sinclair presents himself as having exhibited the phenomenon known as transference. When his father chastises him for having muddy shoes, Sinclair comments that he "could secretly transfer" this beratement to the serious offense about which his father did not know. Second, Sinclair's satisfaction at feeling superior to his father is an expression of the Freudian idea that sons want to rise up against their fathers—a milder form of the more celebrated Oedipus Complex. The presence of psychoanalytic features is most likely due to Hesse's own experience undergoing psychoanalysis around the same time that he was writing Demian.