Outside a wine shop in the poor Parisian suburb of Saint Antoine, a cask of wine accidentally falls and breaks in the street. Everyone in the area scrambles to drink the runoff: cupping their hands, slurping it out of gutters, licking it off the fragments of the broken cask. It turns into a game with dancing and singing in the streets. The wine has stained the ground, stained people's skin and clothes. Someone jokingly uses the spilled wine to scrawl the word "Blood" on a wall.
This scene is an extended metaphor for how people transform into a frenzied mob. It foreshadows the blood to be spilled in the Revolution. The writing on the wall alludes to the Biblical story (in Daniel) of Belshazzar's feast where a disembodied hand prophesied the fall of his empire.
Monsieur Defarge, the owner of the wine shop, enters his store. From her position behind the counter, his wife, Madame Defarge, silently alerts him to the presence of Mr. Lorry and Lucie. Defarge ignores them, instead lamenting the condition of the people with three men, all of whom go by the name "Jacques" (a code name used by revolutionaries in France).
The code name "Jacques" does double service: because it is a common name, it both hides identity and also implies that this revolution is of the people. Lucie and Lorry's presence in Defarge's wine shop indicates that Defarge is Manette's former servant.
Once the "Jacques" have left, Mr. Lorry speaks with Monsieur Defarge. Defarge leads Mr. Lorry and Lucie up to his attic. The room is dark and kept locked for the sake of the inhabitant, Monsieur Defarge explains. Lucie leans on Mr. Lorry for support. Defarge opens the door and they see a white-haired man in the corner stooped over a bench and making shoes.
Because his mind was unoccupied in prison, Dr. Manette compensated by making shoes to occupy his hands. Now, even though he is free, he can't escape the prison of his own mind, so he continues to make shoes.