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The chalk circle is a boundary drawn for two opposing forces in order to settle an argument. In this case, Azdak orders a Chalk Circle to be drawn. He places the child in the middle and orders the two women to pull, saying that whichever woman can pull the child out of the circle will get him. The Governor's wife pulls whereas Grusha lets go. Azdak orders them to do it again, and again Grusha lets go. Azdak then gives Michael to Grusha and orders the Governor's wife to leave.
In a broader sense, this circle represents the dispute over the valley and ensuing battle over ownership.
The chalk circle was a test by Judge Azdak to determine Michael’s true mother. Natella, the wife to the slain governor, wanted her son back so she could access the husband’s estate which was because the wealth was only accessible through the child that is Michael.
The Caucasian Chalk Circle Book.
For example, and i quote... 'Its like in the Bible when King Solomon was asked to choose the woman that was rightfully the mother of the alive child, he came up with a conclusion that the Baby should be cut into two.' The same thing with the judge drawing the circle to determine who should get the baby Michael.
Reading the book. Caucasian Chalk Circle.