When studying King Lear, caught up in all the drama and tragedy we tend to focus on the characters that make the biggest impact. However, I think the Fool is fascinating. He goes under the radar somewhat and disappears after the climax of Lear's abandonment to the elements in Act 3. But this only adds to the intrigue.
In a play of lies and deceit, the Fool is one of the few characters who is honest. Brutally honest. Whilst others pander to Lear in his irrational moments or else trick him, the Fool uses his position as a figure of fun to highlight truth to his king.
As for the inspiration for this character, many believe it comes from Will Sommers, court jester to that other irrational king, Henry VIII. He was notorious for the great liberties he took with the king (e.g. calling Queen Anne Boleyn "a ribald" and the Princess Elizabeth, and his future queen, "a bastard"), which for the most part were taken in good humour.
More intriguing is the theory that the Fool and Cordelia are one in the same. Evidence: the final scene, when Cordelia has been hanged, Lear cries out "my poor fool is hanged" (5.3.304). Also, Cordelia and the Fool are never onstage at the same time. This could be explained by double-casting (common in Shakespeare's time).
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