Antonio is in the Venetian court before the Duke who, although he pities Antonio, can see no way of resolving the situation. Shylock is adamant that he wants the debt he is owed paid:
"And by our holy Sabbath have I sworn
To have the due and forfeit of my bond:
If you deny it, let the danger light
Upon your charter and your city's freedom."
Thus the entire constitution is put under threat by Shylock. It is a moment of great power for the Jew who was formerly ignored and reviled by the Christians. Shylock does not give a direct answer to why he so dearly wants to destroy Antonio, but the basic gist is obvious. Antonio, who is already emasculated because his money does not "breed" (he asks for no interest on his loans) and nor do his loins (he is referred to, and refers to himself as impotent: "I am a tainted whether of the flock") emasculates Shylock by taking away his daughter (the mark of his virility) and his money. Bassanio offers six thousand ducats to annul the debt, but Shylock responds:
"What judgment shall I dread, doing
Were in six parts and every part a ducat,
I would not draw them; I would have my bond."
Shylock is shown to be a man without mercy, but mercy being a very Christian moral trait, it is perhaps not surprising. He is more than merciless, though. He is inhumane and by setting the value of human life below that of money he is condemning himself in the eyes of Shakespeare's audience and, frankly, all but the most cynical audience in any age.
Nerissa enters disguised as a messenger with a letter from Dr Bellario recommending a young doctor who might help judge the case. The doctor enters - Portia disguised as a man. Surprisingly, Portia asks: "'Which is the merchant here, and which the Jew?" It should have been obvious by their attire which was which, and this points us to the extensive doubling that carries on throughout the play between Antonio and Shylock. The depressed Antonio at the start leads to the crushed Shylock at the end. The Jewish Shylock and Christian Antonio become the Christian Shylock and the money lending (Jewish) Antonio by the end of the play.
Portia gives a moving speech on the nature of mercy:
"The quality of mercy is not strain'd,
It droppeth as the gentle rain from heaven
Upon the place beneath: it is twice blest;
It blesseth him that gives and him that takes:"
She then seems to be granting Shylock his wish, and goes so far as to allow him to approach Antonio with the blade. However, owing to Venetian rule, any foreigner who spills a Venetian's blood will be dispossessed by the state. Therefore Shylock will have to make the cut without spilling any blood. Furthermore, Portia insists that exactly one pound of flesh is cut - any more or less and Shylock would be put to death. The victory thus goes to the Christians. Shylock has bastardised logic and justice, and so his comeuppance is all the more satisfying (and embarrassing for the post-World War II audience).
There is a further Venetian law that states that any foreigner who tries to kill a Venetian should give half his property to his intended victim and half to the state. It is noticeable how unfairly the laws of the nation are stacked in favour of the native and against the foreigner. Antonio intervenes on Shylock's behalf and Shylock is allowed to keep half of his money and Antonio will look after half of the money as an inheritance for Lorenzo and Jessica on the condition that Shylock converts to Christianity. Shylock, a broken man, agrees. After a symbolic exchanging of rings - the women are in disguise and persuade the men to give up their rings in thanks for their service - they repair to Shylock's house so that he might sign the deeds entitling Lorenzo and Jessica to half his estate.