Betteredge apologizes for the slowness of his narrative, but "things must be put down in their places, as things actually happened."
After Penelope left him, Nancy the kitchen maid passes him sulkily and explains that Rosanna, the second housemaid, is late for dinner again and must be fetched. Betteredge offers to retrieve her from the Shivering Sands, her usual retreat.
Rosanna Spearman, an ex-thief, was hired into the Verinder household four months previously by Lady Verinder, from a Reformatory. Though the other servants knew nothing of Rosanna's past, she did not become friends with them, spending most of her time alone. Betteredge pities Rosanna, a nice girl with a deformed shoulder. He follows her out to the Shivering Sands, a stretch of ugly quicksand beach near the house. Betteredge finds Rosanna on the beach, crying about "the years that are gone" and her "past life." She feels drawn to the Shivering Sands because she thinks that her "grave is waiting" for her there. Betteredge tries to reassure Rosanna.
Franklin Blake, looking for Betteredge, interrupts Rosanna and Betteredge's conversation. Upon seeing Franklin, Rosanna blushes deeply and quickly leaves. Blake doesn't know her and wonders at her strange reaction.
Franklin questions Betteredge about the three Indians seen near the house. Franklin suspects that the "It" the Indians were wondering about is his uncle Herncastle's diamond, which Franklin takes out of his pocket and shows to Betteredge. Franklin explains that his uncle left the diamond to Rachel as a birthday present in his will and that he, Franklin, had been appointed to deliver it.
Betteredge expresses disgust at the mention of Franklin's uncle Herncastle, and Franklin asks him to explain. Betteredge describes John Herncastle as a "blackguard" who got the Indian diamond by dishonorable means. Back in England after his army service, Herncastle was shunned by the family and ended up alone, possibly with an opium addiction. Betteredge explains how Lady Verinder denied John Herncastle entrance into her home on the occasion of Rachel's birthday two years ago. That day, when Betteredge gave Herncastle the message that Lady Verinder declined to see him, Herncastle had said, "I shall remember my niece's birthday." He died eighteen months afterward.
Franklin looks affected by Betteredge's report. Franklin explains that he wants answers to three questions: Was the diamond the object of a conspiracy in India? Has the conspiracy followed the diamond to England? Did Herncastle mean to put Lady Verinder in the middle of the conspiracy by leaving the diamond to Rachel?
Franklin and Betteredge remain sitting at the Shivering Sands, and Franklin explains how his father, in need of papers that Herncastle held, came to be John Herncastle's executor. Herncastle had also entrusted the diamond to Franklin's father for safe-keeping and left him instructions to hold the diamond safe as long as Herncastle lived and died naturally, but to send it to Amsterdam to be cut up into separate stones in the event of Herncastle's death by violence. Thus Herncastle made the safety of the stone in one piece dependent upon his own safety. Franklin explains that the diamond has a flaw in the center and would have been worth more as separate pieces, so the diamond was wanted in one piece for spiritual, not economic, reasons. This has led Franklin to believe that Herncastle was trying to safeguard his life from the Indians who originally owned the jewel and had followed it to England.
Franklin describes being followed by a dark-complected man when he took the diamond out of the bank in London to bring to Lady Verinder's. Franklin shows Betteredge Herncastle's will, which bequeaths the diamond to Rachel, to be given to her in her mother's presence, as a token of forgiveness for being previously denied entrance to the Verinder's on Rachel's birthday. Franklin still fears that the diamond is meant to bring ill will to Rachel and her family, but concedes that he cannot deny the diamond to Rachel, because it is worth so much money.
Franklin tries to think through the dilemma with Betteredge using both the "Subjective" and "Objective" viewpoints. Betteredge marvels at the many foreign sides of Franklin's character, which make him seem to contradict himself constantly. Betteredge finally advises Franklin to put the diamond into the bank in Frizinghall, a nearby town, until Rachel's birthday next month. Franklin leaves for the bank immediately.
Rosanna Spearman is introduced in Chapter IV. Collins is particularly noted for the realistic detail involved with his non-central characters. Thus, Rosanna, being a former thief with a deformity, is something of an outcast. Yet she does not exist as a mere stereotype. Her character is immediately associated with tragedy, and the potential for her character to be central or heroic is expressed in spite of her servant stature. Betteredge explains that "there was just a dash of something that wasn't like a housemaid, and that was like a lady." Rosanna seems to be the outcast counterpart to Rachel Verinder.
Rosanna also explicitly introduces the theme of the haunting of the past in the novel. Rosanna, though reformed from her life of crime, is still plagued by past misdeeds: "My past life still comes back to me sometimes." The persistence of the past, and specifically past misdeeds, is explicit throughout The Moonstone with the main example being the long-standing curse on the stone itself, stemming from a variety of thefts of it. The persistence of a past misdeed can also be seen in John Herncastle's grudge regarding his sister's refusal to admit him to Rachel's birthday. With remarkable persistence, this grudge outlives even Herncastle—he ensures its continuance through his will.
The question of Herncastle's grudge and his will is one of the first mini- mysteries within the larger mystery of The Moonstone. Before the main crime of the theft of the diamond is even committed, detective work is introduced into the novel by way of Franklin's research of the history of Herncastle and his diamond. Franklin posits a series of logically related questions in much the same way that Sergeant Cuff will approach his investigation of the diamond theft.
Franklin concludes that the three Indians that Bettredge and Penelope have seen on the Verinder property are probably in search of the diamond. He reaches this conclusion by reasoning that the stipulations in Herncastle's instructions to his lawyer show that he was protecting himself from persons who wanted the diamond for non-commercial reasons. This theme of the commercial value of the diamond versus the spiritual value persists throughout the novel. The diamond has a flaw in the center and thus would be worth more cut up. But to the Indians, the diamond is only spiritually symbolic as a whole—a whole that rightfully belongs in its setting in their idol. Betteredge and Franklin show themselves to be instead compelled by the economic value of the diamond, when they cannot resolve to keep the gem from Rachel, despite the probable danger that comes with it. Betteredge at one point suggests disposing of it, but Franklin agrees to do so only, "if you [Betteredge] have got the value of the stone in your pocket," and Betteredge accedes to this reasoning.
In these chapters, belief in the non-economic value of the diamond is related to belief in the curse that the diamond might bring with it. The introduction of such non-concrete or unrealistic possibilities is accompanied by discussion within the narrative of realism and the fantastic. Betteredge's narrative calls attention to the exotic aspects of the story as when he remarks, "our quite English house suddenly invaded by a devilish Indian Diamond Who ever heard the like of it—in the nineteenth century, mind; in an age of progress, and in a country which rejoices in the blessings of the British constitution? Nobody ever heard the like of it, and consequently, nobody can be expected to believe it. I shall go on with my story, however, in spite of that." Collins addresses a different side of realism through the character of Franklin. Whereas Betteredge is sympathetic to our potential disbelief, Franklin shows elitist scorn for those whose imaginations cannot extend beyond the everyday: "Nothing in this world, Betteredge, is probable unless it appeals to our own trumpery experience; and we only believe in a romance when we see it in a newspaper." The Moonstone is, of course, subtitled "A Romance," and the comments put in both Betteredge's and Franklin's mouths can be read as winks to us from Collins himself.