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I've had a few people read pieces of narrative writing I've done, and they seem to take issue with the fact that I sometimes put a piece of speech inline with the rest of a non-dialogue paragraph, like so:

Jill found a box of mints she liked, and took them off the shelf. She walked up to the cashier. "How much are these mints?" she asked, holding up the box.

"Two fifty," replied the cashier. Jill handed him the money, took the mints, and left the store.

Sometimes it's part of, or sandwiched in the middle of, a longer paragraph, like this:

As Jill walked home, the mints jiggled happily in the box in her pocket, as if they were waiting to be eaten. Suddenly, the box snapped opened and one mint fell out. "Dammit," said Jill, bending down to pick it up. As she picked it up, eying it, she noticed that the mint didn't have any dirt on it at all, despite falling onto the dirty, wet sidewalk. "I guess you're spoiled anyway, so I can't bring you to Fran," muttered Jill, so she popped it in her mouth. Suddenly, she felt changes occurring in her.

Is there actually a style rule against this? Does it actually make it more confusing for the reader?

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Every utterance by a different person needs a new paragraph. If it's all the same person, I believe it's perfectly fine to run it all in one paragraph. –  Martha Jan 4 '13 at 2:27
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Style rules are found in style manuals. Different style manuals have different style rules. Publishers use what are often called house style, which is often a blend of some standard style manual's rules with rule favored by the publishing house. Different publishers have different house styles. It all depends on who's publishing your stuff. The only reasonable rule is Don't confuse the reader, unless, of course, that's your explicit perverted purpose. –  Bill Franke Jan 4 '13 at 2:35
    
Often something that doesn't confuse one reader will confuse another, and each side will insist that the other side is wrong. –  Joe Zeng Jan 4 '13 at 3:18
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Which all goes to prove that you can't win for losing. If you write for yourself and satisfy yourself that an intelligent reader will understand your orthographic conventions, you can ignore any potential reader who will be confused by them. They aren't worth pandering to in any case. Write for those who will appreciate your writing: You first and like-minded souls second. Screw the rest. –  Bill Franke Jan 4 '13 at 4:01
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General usage suggests that each time there's dialogue, it get its own paragraph and that narrative paragraphs be bereft of dialogue. That's just for English. Chinese and Japanese don't even separate words, and even these days are sometimes written from right to left instead of left to right. Other languages have other conventions. It's all about expectations. And, yes, humans are inherently judgmental: There's still some survival value in that. –  Bill Franke Jan 4 '13 at 4:38
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I am in the middle of editing a book where I'm adding this technique, so I endorse it whole-heartedly. :) My two rules are:

  1. Don't confuse the reader. Make sure that no matter what, it's clear who is speaking. This applies to narration, dialogue tags, action tags, and lack thereof of all of them.
  2. A new speaker gets a new paragraph, regardless of where the dialogue starts in the paragraph.

Your examples follow both these rules, and I quite like them. There's no reason to start Jill's dialogue on its own line in the middle of a narrative paragraph when it's perfectly clear she's the only one speaking. And since she continues to speak without anyone else interrupting her, the second line of dialogue still doesn't need a new paragraph.

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Now, my addendum to that is, sometimes the paragraph where I had Jill say two things will have two different speakers, but not in dialogue. –  Joe Z. Jan 4 '13 at 20:37
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If it's actual dialogue, each speaker will get their own line, but sometimes speech isn't dialogue. –  Joe Z. Jan 4 '13 at 20:40
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Now, while others mentioned correctly, one paragraph per speaker, I do have a problem with your other example.

As Jill walked home, the mints jiggled happily in the box in her pocket, as if they were waiting to be eaten.(1) Suddenly, the box snapped opened and one mint fell out. (2)"Dammit," said Jill, bending down to pick it up. (3)As she picked it up, eying it, she noticed that the mint didn't have any dirt on it at all, despite falling onto the dirty, wet sidewalk. (4)"I guess you're spoiled anyway, so I can't bring you to Fran," muttered Jill, so she popped it in her mouth.(5)

Suddenly, she felt changes occurring in her.

This is about paragraph breaks between segments of a story. It's hard to put this rule in words. Essentially, every turn of action should get a new paragraph. What is a turn of action? Now this is a very fuzzy expression and it's mostly up to the author, although in certain cases it's indisputable - like (5), where I put the paragraph break where it absolutely belongs. We are no longer on our standard run-off-the-mill walk. Changes occur. New paragraph is a must.

Now, where to introduce new paragraphs, other than change of speaker in a dialogue?

  • A rapid, unexpected change of state. Note, a very brief introduction of prior state is still allowed, like I'm not separating the first sentence - one might put paragraph break at (1), this is at writer's discretion, but the single, short sentence would be a poor paragraph on its own. Longer introductions of prior state definitely should be separate paragraphs.
  • A minor change of state, if the paragraph has been going on long enough. (3) would be permissible but that would make for some very short paragraphs, not really encouraged.
  • Longer pauses in action. If a character stops to gaze at the sky for a minute, you're fully justified to resume the action once the minute is past starting a new paragraph.
  • Changes of scene. The moment Jill arrives home, enters and greets Fran, this should be a new paragraph. (the action of unlocking the door and entering may be within the allowance of introductory sentence).
  • A new thought, a new subject. The rule "one paragraph per speaker" should be violated if a person speaks at length. They arrive at an intermediate conclusion, a point necessary to continue with the following train of thought, then they continue with a new paragraph. (I always had a problem: what to do with quote marks around these...)
  • Internal dialogue. A character asks self a question. You are fully allowed to answer in a new paragraph, although this is not a necessity. (2)(4)
  • Introducing severe transitions of state can be paragraphs on their on. Note how the sentence after (5) can be the first of a new paragraph, or (better!) be a very short paragraph on its own, before you start describing the transformation in another one. Such tiny, short paragraphs are like exclamation marks, a sign that something big is about to happen.

Note, none of these are written in stone. But just as breaking the introductory sentence (1) would make it less interesting, not breaking off the turn of events (5) blurs the importance of the event.

Think of paragraph breaks as giving the reader a second of pause to take the content in, absorb the meaning and place it in greater image of the story. It's a bite-sized portion of information. Sentences are for clarity while reading and sections/chapters are for continuity separation, but paragraphs are the most important units of information, absorbable by the reader as a whole.

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I'll admit the last sentence was a bit hasty of me. –  Joe Z. Jan 5 '13 at 14:50
    
I agree with you completely, though, that every turn of action should get a new paragraph. It's just that sometimes changing speakers doesn't count as a turn of action if they're not engaged in dialogue (at least the way I write things). –  Joe Z. Jan 5 '13 at 14:51
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As others have said, the convention is that each new speaker gets a new paragraph. Breaks in the statements of one person do not require a new paragraph. We generally do not break the speech of a single individual across multiple paragraphs unless the speech is relatively long.

Some of the comments on this question have indicated that you should disregard conventions and do whatever you like. If taken literally, I must disagree with this. While I would be the last to advocate slavish adherance to conventions, conventions exist for a reason: They allow us to convey information to the reader more economically. To take a silly example, suppose you said that you don't like putting quote marks around quotes, so you're going to use plus signs instead. Now the reader has to figure out that in your writing, plus signs indicate a quote. You make the reader do extra work, to shift mental gears, and for what? If, in your particular book or article, this serves some definite purpose -- hard to imagine in this example, but maybe you could some up with something -- then maybe it's justified. But don't break the rules just because you feel like it. I only break the rules when, (a) I want something to stand out, or (b) when the rule is so illogical in general or inapplicable in the present case that the advantages of breaking the rule outweigh the extra burden on the reader.

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The fact that you had people complain suggest that there is something wrong. Of course, it greatly depends who is doing the complaining, since some people will complain about all sorts of nonsense, but reading your example, I too have a complaint. My complaint is not that you have inline speech (I actually like inline speech, it makes the dialogue less dry, I see nothing wrong with that) it's that you have one character speaking while a different one is performing an action in the same paragraph.

"Two fifty," replied the cashier. Jill handed him the money, took the mints, and left the store.

The cashier is speaking here, but it's Jill that's doing the action. This isn't a very complex action so as to confuse anyone, but writing this way increases the chance that there might come an action complex enough that would make it hard to differentiate who is actually speaking. It's much more cleaner, so to say, if it's separated:

"Two fifty," replied the cashier.

Jill handed him the money, took the mints, and left the store.

Some even go as far as to separate any action made by different characters into their own paragraphs. For example:

Jill handed him the money. He took it, deposited it into the register and returned ten cents worth of change.

There is no dialogue here, but remember, dialogue is just another type of action. It will always be much clearer if each character gets his own paragraph. If this was Jim and not Jill handing him the money, could you be absolutely certain who is returning the change, Jim or the cashier? When you put a paragraph break there, that's a queue to the reader that a different character is performing the action now, so there's less chance for confusion.

Jim handed him the money.

He took it, deposited it into the register and returned ten cents worth of change.

Like others had said before, there are different styles used by different publishers, which change and evolve not only with time but place as well - different countries have different customs. And these are only customs, things readers are accustomed to from books they've already read. For example, in some countries you'll find dialogue separated by dashes instead of quotes, and while it won't confuse the readers from those countries because that's what they're used to, it will confuse readers from other countries. The one single rule we can all agree on is not to confuse the reader. Your best bet for not breaking that rule is to stick with what the reader is used to.

Also, don't ask yourself what are the rules of style, ask yourself how can you make things more clear to the reader. I think everyone can agree that separating different characters actions (be it dialogue or not) into their own paragraphs can only make it more clear, not more confusing. In other words, I see more benefits in separating it than leaving it in the same paragraph. Actually, I see no benefits at all in leaving it in the same paragraph.

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Your example is exactly the kind of structure I am editing out of the novel I'm currently working on. This is because I feel the paragraph break adds a fractional pause to the action, and in this example, there isn't one. Jim hands the cashier the money, and the cashier puts it in the till instantly. Adding the paragraph break reads, to me, like there was a moment's pause, a hesitation, before the cashier accepted it. If the referent of "him" is unclear, then focus on clearing that up ("The cashier took the money") rather than adding unnecessary pauses. –  Lauren Ipsum Jan 7 '13 at 13:41
    
So we agree "don't confuse the reader," but to my eyes, breaking up the text into this constant staccato of separate actions rather than the normal flow of give and take is more confusing, not less. As a reader I'm looking at that pause and wondering what the authorial weight and intent is. Are we supposed to wonder if Jim's money is real? If the cashier is spying on Jim and is verifying his identity? So to me, leaving in the same paragraph is a significant benefit, because it reduces the significance of what is a meaningless action into the background where it belongs. –  Lauren Ipsum Jan 7 '13 at 13:45
    
@Lauren - Maybe there isn't a pause, but there is a shift, a change in the action and who's performing that action. The cashier probably stood still, waiting to take the money, so the new paragraph also indicates his switch from inaction to action. Not every paragraph indicates a pause. Like SF said above, it can indicate a change of state, change of thought... This is both a change of subject, from Jim to cashier, and a change of state from standing still to taking the money, so the break is more than justified. If we break only for pause, the whole story would be a few giant paragraphs :) –  Tannalein Jan 7 '13 at 16:48
    
A change of subject is easily done by using "The cashier." I don't know where you live, but where I am, the act of paying for something with cash happens pretty dang quick. It's not a change of action; it's a fairly continuous series of actions. And Jill/Jim is still the instigator and the protagonist. We are still focused on Jill/Jim. You could as easily say "Jill paid for the mints, collected her change, and left the store" and it would have the same elapsed time and impact without the cashier's presence in the sentence. –  Lauren Ipsum Jan 7 '13 at 17:25
    
@LaurenIpsum: Then write it like that and avoid a new paragraph, cashier doesn't matter anyway ;) Imagine it's a scene from a movie. Without the paragraph break, it would be one wide shot of Jill paying for the mints. With the break, it would be equivalent to one close shot of Jill paying, then another close shot of cashier returning the change. No pause, only a shift in focus. Nothing confusing. In this example cashier is unimportant, no reason to switch attention onto him, but what if he wasn't? With the movie, both versions are just as valid, but with writing, "close shots" are more clear. –  Tannalein Jan 7 '13 at 20:20
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