The Yankee starts to doubt his previous assessment of his situation when a young girl walks by, completely naked, and seems utterly astonished at his appearance (rather than the knight's or her own). They come to a village full of wretchedly dressed peasants living in squalor, and they are all likewise astounded at the Yankee's appearance. A great procession of knights comes along, and the Yankee and Clarence follow it to a castle. The Yankee asks an old man about the castle, which he still assumes is an asylum, and he decides from the man's archaic speech that he must be a patient.
He asks another man, who says he is too busy to talk now but is very curious about the Yankee's clothes. He meets a chatty page named Clarence who says he was born in 513 and that it is now June 19, 528, and they are at the court of King Arthur. The Yankee happens to know that a total eclipse of the sun took place on June 21, 528, so he decides to wait and see if this happens to confirm the boy's story. In the meantime, he determines to make the most of things and get himself put in charge of his new surroundings. Clarence tells him he is the prisoner of Sir Kay, the seneschal, and that he is to be thrown into prison and ransomed after being presented to Arthur.
He is brought into the hall of the Table Round. He sees a group of other prisoners there, wounded but uncomplaining, and realizes they have been on the other side of this situation before and accept it as a matter of course. He listens as knights tell outlandish stories about dueling strangers. A group of prisoners present themselves to Guenever as Kay's prisoners. No one believes this, and Kay rises and tells an exaggerated story about Sir Launcelot taking his armor and masquerading as him. Merlin rises and puts everyone to sleep with a story he always tells about how he helped Arthur acquire a magical sword and scabbard from the Lady of the Lake. Everyone hates the old magician for his constant repetition of this story, but they are all deathly afraid of him.
Sir Dinadan is the first of the knights to awaken after Merlin's tale, and he creates a great noise and confusion by tying some metal mugs to a dog's tale. The whole company enjoys this joke immensely, especially Dinadan, who rises and gives a speech full of bland, old jokes. Kay rises and gives an outlandish account of capturing the Yankee, whom he describes as a hideous monster from a land of barbarians with enchanted clothes that prevent him from being injured, and indifferently condemns him to die on the twenty-first. They argue over how best to kill him with his enchanted clothes until Merlin suggests they remove them; they strip him and take him off to the dungeon.
The theme of social inequality begins to develop immediately in the first chapter. The peasants live in conditions of the most wretched sort, with scant clothing (the children go naked as a rule), poor food, and filthy living spaces. The iron collars the Yankee observes on a sizeable portion of the population imply rampant slavery. The squalor of the peasants' lives contrasts sharply with the color and splendor of the knights and the royal court. The parade of knights, the castle, the ladies' dresses, etc., are all described as luxurious and colorful. The strict subordination of the peasants to the nobles also appears, as Sir Kay ignores the humble salutations of the commoners he passes.
The Yankee infers quite reasonably that whether he is in an asylum or actually in the sixth century, he has a definite intellectual advantage over the people around him. He decides immediately to put this advantage to use to gain authority and respect and start improving his surroundings. Even before he gets to the castle and learns where he is, he has already picked up on the state of the agriculture in the gardens in the town as needing improvement. He also sees room for improvement in the castle, as he makes fun of the tapestries and observes that the floor is in need of repair. Even while he is in arguably the most wretched state of all as a prisoner, he looks down on the king and the nobles for their uncouthness at the dinner table and their general vulgarity and lack of embarrassment at the human body. He remarks that their boorishness is characteristic of Europeans even in his day, one of many attacks on modern Europeans in the book. He describes them as simple but violent and dishonest (he later comes to realize that knights are basically honest, they just exaggerate wildly). He calls them childish and brainless but admits a strangely lovable quality about them. He compares them to animals and Indian savages (he makes several racist remarks about Native Americans in the book), but he picks out Galahad, Arthur, and Launcelot as looking especially majestic.
Strangely, though the Yankee seems to have an encyclopedic knowledge of history (and everything else) throughout the rest of the book, he takes an inordinate amount of time to connect the knight and Camelot and the medieval setting in general to tell him where he is or at least where he seems to be. Perhaps he is so practical, his mind will not even allow for the possibility that he is anywhere but where he was moments before he got hit with the crowbar. The Yankee does pick up on the queen's less than discreet glances at Launcelot, which will become an important plot element later in the book. Merlin's story, which everyone in the hall so detests, is taken straight from Malory. The Yankee admires the style of the piece as simple and well-told (although he thinks it is patently untrue), but he admits that it would get old after a few tellings. Perhaps this opinion provides some insight into Twain's own and hints at the original impetus for his reworking the Arthur legend.