The Great Diamond Hoax

Jan 31, 2017 - by Chuck Lyons

In the summer of 1871,two grubby prospectors conned a Who's Who of San Francisco's financial elite as well of Charles Tiffany of New York to invest $10 million in diamond fields that did not exist.  

by Chuck Lyons

The framed stock certificate on the wall in banker William C. Ralston’s office told the story, a story he didn’t want to forget. It reminded him to be careful, to move slowly, and to be prudent.

He had learned those lessons the hard way.

In the summer of 1871, two rough prospectors, their clothes and faces dusty and showing signs of rugged living appeared at the Bank of California in San Francisco with a canvas sack they wanted to lock up in the bank’s vault.  They identified themselves as cousins, said they were prospectors, and were just in from a prospecting trip in what they called “Indian country.” They identified themselves as Philip Arnold and John Slack.

They refused say what was in their canvas sack; they just wanted to lock it up so they knew it was safe.

The more they refused to open it, of course, the more curious bank officials became.  Finally bank president Ralston was called and only after he and other bank officials had pleaded with Arnold and Slack did the two men agree to open the sack in front of a group of San Francisco’s leading citizens. But they made the bank officials swear to keep the contents secret.

They finally opened the bag and poured out a number of diamonds with a few rubies, and possibly sapphires and emeralds, mixed in.

Arnold, who acted as spokesman for the pair, said the uncut gems were part of a hoard that they had come across. They were laying on top of the ground, Arnold said, and buried just below the surface.

Then he refused to say anymore.

The Ohio-born Ralston, the ever-careful banker, had come to California in 1854 and had organized the Bank of California 10 years later.  By the 1870 the bank was the most highly-regarded financial institution in the Far West, and Ralston was considered San Francisco’s leading citizen. He didn’t get there, he told himself, by making foolish investments and insisted that the gems lying on a table in the Bank of California be authenticated.

He had the stones taken to San Francisco’s leading jeweler who immediately proclaimed them genuine.

Meanwhile, the small group of men who were in on the secret tried to contain their excitement. They were all were aware of the gold strikes in the nearby Sierra Mountains  some 20 years earlier, the gold and silver strikes in Colorado 12 years ago, and  the mining of opals in California and Idaho. Was this another great strike, another Sutter’s Mill gold strike, or another Kimberly Diamond field like the one that had been discovered in South Africa a couple years earlier?

And—more importantly—were they in on the ground floor of it?

Arnold and Slack admitted at a number of conferences with the men held in San Francisco that they needed financing to develop their “find” but were reluctant to give any details until they had safeguards in place to protect their interests. Finally, Arnold and Slack, who the bankers had come to consider “unsophisticated” laborers, bowed under pressure from the San Francisco elite and agreed to show two members of the group, picked by Ralston, the field where they said they had picked up the diamonds and rubies.  But they would only do that, Arnold said, if the two selected men allowed themselves to be blindfolded first.

They also asked for $100,000 as a sign of good faith.

The investors who were getting more and more excited as the area’s potential dawned on them agreed, and the group’s two representatives boarded a Union Pacific train and headed out of San Francisco. The site of the “diamond field” has never been precisely determined and investigators have suggested somewhere in Colorado or Utah or even Arizona. The best guess is probably somewhere in the Table Rock area west of Rawlins, Wyoming, or in the northeast corner of Utah on the Colorado border.  (A mountain in the latter area is still known as Diamond Mountain). When the men arrived at the station, wherever it was, they were met by Arnold and taken on horseback for four days into wild country. They were then blindfolded for the last stage of the trip. At last, about four o’clock in the afternoon of June 4, 1872, they stopped, the blindfolds were removed, and the men began to look for precious stones.

And they found them.

One of the men involved in the wilderness trip later claimed they also found a few pearls, which are formed in clam shells, among the many stones they picked up and dug up at the field.

“Why a few pearls weren’t thrown in for good luck, I have never yet been able to tell. Probably it was an oversight,” he later said.

The men returned to San Francisco excited by what they had seen and anxious to exploit the find for their general profit.

Huddling together, the San Francisco group proposed that a corporation be formed with half the stock going to Arnold and Slack and the rest sold to investors—mainly themselves. By this time, there was no longer any need for secrecy, and some of the diamonds were put on display in the window of a San Francisco jewelry store, initially to arouse public interest in the planned stock sale and to feed the growing “diamond-fever” in the city. Excitement, mixed with a little skepticism, had already been spreading in the area with other area men wanting to get in on this apparent good thing. To counter the small amount of skepticism that had appeared, the investor group sent the diamonds the prospectors had brought to Tiffany & Company in New York City, which declared the diamonds genuine, valued them at $150,000, and said that a quantity of such stones would be worth “a rajah’s ransom.”

Charles Tiffany, the company’s founder, was allowed into the investors’ group as was Civil War general and 1864 Presidential candidate George McClellan, and Civil War general Benjamin Butler, then a United States Representative.

Tiffany’s authentication seemed to erase any lingering doubts about what they had lucked into, and the group went ahead and formed the San Francisco and New York Mining and Commercial Company with a capitalization of $10 million. They hired a well-known mining engineer, Henry Janin, to make a survey of the diamond-encrusted property.  Janin spent time at the site and reported back that “25 laborers could wash out a million dollars worth of diamonds in a month.”

He also said he was anxious to invest himself.

As well as his fee for inspecting the field, Janin was given the right to buy one thousand shares of the company’s stock for $10 a share.  He was said to be “wildly enthusiastic" about the prospects for the groups’ find, and Janin wrote that the company’s shares should easily be worth $40 a share.  (He was able to later sell his one thousand shares for that later figure and netted a cool $30,000).

Word of Janin’s report got out and prospectors—and others turned prospector—headed into the western outback sure that their fortunes were just laying around waiting to be picked up. Some of these prospecting groups were led by guides hired the investors group to lead the gullible away from the actual “diamond field.” In addition at least 25 other companies with a total capitalization of $200 million were formed to prospect for diamonds.

The cousins had triggered a diamond prospecting craze in the western United States, especially in Arizona, New Mexico, Utah, Wyoming, and Colorado. For a short time, it began to look like another California gold rush. The attitude of the times was summed up by Tucson Weekly Arizonian in April of 1870 announcing a silver discovery in the area: “We have found it! The greatest treasures ever discovered on the continent, and doubtless the greatest treasures ever witnessed by the eyes of man.”  That discovery failed to pan out, and the treasure hunters of the day moved on to the next big thing. Wealth was there, they believed, just waiting for them. Even mountain men Jim Bridger and Kit Carson, who were known to spin a tall tale now and then, had told of diamonds, rubies, and other gems lying around on the ground. Closer to the truth, a couple of diamonds had actually been found in California’s Sierra Mountains.

“Though it may not pay to hunt for diamonds,” a state geologist said about those discoveries, “yet it always pays to pick them up when you do happen to see them.”

In addition much of the terrain of the Far West, especially the desert areas of Arizona and New Mexico resembled the terrain found in South Africa.

Meanwhile, the San Francisco and New York investors had abandoned their plans to offer stock to the public. They agreed they would themselves be the sole stockholders.  They also pressured Arnold and Slack to sell their interest in the enterprise and finally paid the two men an undisclosed sum for their half interest. That sum may have been as much a $660,000.

The investors were now the sole owners of the field and its diamonds.

Then in the fall of 1872 the great diamond bubble burst.

Clarence King , an engineer and geologist in the employ of the United States government, had been piecing together the bits and pieces of information coming out of San Francisco and was able to locate  the “diamond field” in question. King was familiar with the area and with its geology and could not believe that diamonds had been created there.

He traveled to the area, found the field, and then sent a telegram to the investors group.

King’s telegram said he believed the diamond find was a hoax and that he could prove it.  Several of the new company’s officials were sent to meet King at the field, and he showed them that some of the diamonds lying on the ground there showed evidence of having been cut and polished.  He also showed them where holes had been bored into the ground and diamonds inserted.

The field, King said, had been “salted.” The gems had been consciously strewn there.

Diamonds the investors’ party picked up during the meeting were taken back to San Francisco and evaluated. They proved not to be the same high-quality stones as in the original batch but were actually industrial diamonds of little value. They came from South Africa. Further investigation revealed that Arnold and Slack had acquired $50,000 in the sale of some mining property and had used part if it to buy the South African diamonds from dealers in Amsterdam and London.

The entire thing of course had been well-planned and well-executed scam.

The time was ripe for such a swindle. The great American gold rushes were over. The Kimberley Diamond field in South Africa had been discovered a few years early, and the interest of get-rich-quick schemers and adventurers had been turning from gold to precious stones.

Meanwhile, Arnold and Slack had disappeared.

Arnold, who was believed to be the brains behind the scheme, was found to be a former hatter’s apprentice, a veteran of the Mexican War, and gold rush forty-niner, who had been working for the past 20 years in various mining-related jobs. It was also discovered that in 1870 he had been working as an assistant bookkeeper for the Diamond Drill Co., a San Francisco drill maker that used diamond-headed bits. He was eventually located at his former home in Elizabethtown, Kentucky. The wounds of the Civil War had not yet healed, and Confederate Kentucky refused flatly to extradite one of it own, especially one who had put one over on a bunch a Yankees. Arnold did pay back $150,000 of the money he had received in return for a promise of immunity from further prosecution. He went on to open his own bank and was wounded in a gunfight with a competitor in 1878.  He died of pneumonia a few months later.

Slack, who was discovered to be like Arnold a Mexican War veteran and a California forty-niner, had dropped from public view. He is believed, however, to have moved to St. Louis, where he owned a casket-making company. He later became a casket maker and undertaker in White Oaks, New Mexico where he died in 1896 at the age of 76.  He was said to have behind an estate of only $1,600.

It has been speculated that Arnold and Slack used the original $100,000 given them by the investors to buy the additional gems that were used to “salt” the field.  If so, that means ironically that the investors paid their own money for the diamonds that were used to cheat them.

Mining engineer Janin, who had made $30,000 selling company stock, was the only person—besides Arnold and Slack—to make any money in the venture, while geologist King became an author and an international celebrity for his part in exposing the fraud.  He later became the first director of the United States Geological Survey but died, deeply in debt, of tuberculosis at age 59.  President Theodore Roosevelt, a friend of King, sent a message of condolence from the White House.

Ralston mounted one of the now worthless company’s stock certificates in his office as a reminder of his own foolishness. But in the years following the diamond hoax, he over-invested his own and the bank’s money in bad mining schemes. On August 16, 1875, the Bank of California was forced to close temporarily. The following day the bank directors demanded Ralston’s resignation as bank president. He handed it in and left for his daily swim in San Francisco Bay. Later that day, Ralston was found dead from drowning.  Whether the drowning was a suicide or an ironically timed accident has never been determined.

The entire episode has gone down in history as the Great Diamond Hoax.

At the time the San Francisco Chronicle described it as “the most gigantic and barefaced swindle of the age.”

And Philip Arnold and his “cousin” John Slack had gotten away with it.

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