because he will do anything for his friend
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He proposes this penalty when Antonio is negotiating the loan from him, in Act 1 Scene 3, around line 148.
The phrase "pound of flesh" appears in the Bible in 1 Corinthians 6:7, where Paul writes, "Why not rather be wronged? Why not rather be cheated?" Paul is trying to combat the idea of demanding one's "pound of flesh" and instead argues that love "keeps no record of wrongs". He also says that it's better to be cheated than to be unloving, and that Jesus Christ's death on the cross is an example of this type of love.
He treated him with disrespect because he was a Jew and a money lender. he spit at him in the merchant of Venice playbook act 1 scene 3: Act 1, Scene 3: Antonio called Shylock a misbeliever - insults his faith, called him a cur - a dog, spat on him, kicked him. Antonio was not sorry - he said he would gladly do it again. Shylock was treated horribly by Antonio and wanted revenge. (1.3.110)
A pound.
The conflict is between Antonio and Shylock but Shylock is hated by everyone in Venice because he was a Jew, so that's Bassanio, Portia and all the other people in the play