Thereupon Niels shut himself up in the workshop for a whole day, and, as on the former occasion, the knife was made without his knowing how it had happened.
When the day arrived on which the work was to be exhibited, Niels dressed himself in his best clothes, and went with his master up to the palace where the two kings were expecting them.
The strange smith first showed his knife. It was so beautiful, and so curiously wrought, that it was a pleasure to look at; it was, moreover, so sharp and well-tempered that it would cut through a millstone as easily as through a cheese. Niels's knife, on the contrary, looked very poor and common.
The King already began to think he had lost his wager, and spoke harshly to the master-smith, when his boy begged leave to examine the stranger's knife a little more closely.
After having looked at it for some time, he said: "This is a beautiful piece of workmanship which you have made, and shame on those who would say otherwise; but my master is, nevertheless, your superior, as you shall soon experience."
Saying this, he took the stranger's knife and split it lengthwise from point to handle with his own knife as easily as one splits a twig of willow. The kings could scarcely believe their eyes, and the consequence was that Niels's master was declared the victor.
When Niels asked for payment, the master refused to give him anything, although knowing full well that the poor boy only wanted the money to help his father. Upon this Niels grew angry, went to the King, and told who it was that had made both the lock and the knife. The master was then called, but he denied everything, and accused Niels of being an idle boy, whom he had taken into service out of charity and compassion.
"We shall soon find out the truth of this story," said the King, who sided with the master. "Since thou sayest it is thou who hast made this wonderful knife, and thy master says it is he who has done it, I will adjudge each of you to make a sword for me within eight days. He who can make the most perfect one shall be my master-smith; but he who loses shall forfeit his life."
Niels was well satisfied with this agreement. He went home, packed up all his things, and bade his master farewell. The smith would gladly have made all good again, but Neils appeared not to understand him, and went his way. He engaged with another master, and began cheerfully to work on the sword.
When the appointed day arrived, both Niels and his former master met at the palace, and the master produced a sword of the most beautiful workmanship that anyone could wish to see. It was inlaid with gold and set with precious stones. The King was greatly delighted with it.