The Great Diamond Hoax, one of the most notorious mining swindles of the time, is exposed with an article in the San Francisco Evening Bulletin.
Fraudulent gold and silver mines were common in the years following the California Gold Rush of 1849. Swindlers fooled many eager greenhorns by "salting" worthless mines with particles of gold dust to make them appear mineral-rich. However, few con men were as daring as Kentucky cousins Philip Arnold and John Slack, who convinced San Francisco capitalists to invest in a worthless mine in the northwestern corner of Colorado.
Arnold and Slack played their con perfectly. They arrived in San Francisco in 1872 and tried to deposit a bag of uncut diamonds at a bank. When questioned, the two men quickly disappeared, acting as if they were reluctant to talk about their discovery. Intrigued, a bank director named William Ralston tracked down the men. Assuming he was dealing with unsophisticated country bumpkins, he set out to take control of the diamond mine. The two cousins agreed to take a blindfolded mining expert to the site; the expert returned to report that the mine was indeed rich with diamonds and rubies.
Joining forces with a number of other prominent San Francisco financiers, Ralston formed the New York Mining and Commercial Company, capitalized at $10 million, and began selling stock to eager investors. As a show of good faith, Arnold and Slack received about $600,000-small change in comparison to the supposed value of the diamond mine. Convinced that the American West must have many other major deposits of diamonds, at least 25 other diamond exploration companies formed in the subsequent months.
Clarence King, the then-little-known young leader of a geographical survey of the 40th parallel, finally exposed the cousins' diamond mine as a hoax. A brilliant geologist and mining engineer, King was suspicious of the mine from the start. He correctly deduced the location of the supposed mine, raced off to investigate, and soon realized that the swindlers had salted the mine--some of the gems he found even showed jewelers-cut marks.
Back in San Francisco, King exposed the fraud in the newspapers and the Great Diamond Hoax collapsed. Ralston returned $80,000 to each of his investors, but he was never able to recover the $600,000 given to the two cousins. Arnold lived out the few remaining years of his life in luxury in Kentucky before dying of pneumonia in 1878. Slack apparently squandered his share of the money, for he was last reported working as a coffin maker in New Mexico. King's role in exposing the fraud brought him national recognition--he became the first director of the United States Geological Survey.