An extract from the family papers of a cousin to John Herncastle tells the story of his and John Herncastle's parts in the storming of the castle of Seringapatam in India under General Baird of the British army in 1799. The narrator explains the background to his ill will toward John Herncastle, who stole the Yellow "Moonstone" diamond from Seringapatam. The diamond originally existed as part of a Hindu shrine to the moon god. This Hindu deity commanded that the Moonstone be guarded at all times by three Brahmin priests and that a curse would befall anyone who stole the gem. At the beginning of the eighteenth century, the jewel was stolen by Mohammedans and eventually wound up set in a dagger handle in the palace at Seringapatam, still guarded by three Brahmins, who posed as Mussulmen in the palace household.

The narrator and John Herncastle heard this history of the diamond in their army camp, and Herncastle was heard to boast that if Seringapatam should be taken, he would steal the diamond. After the storming of the castle, the narrator and Herncastle were sent to prevent looting by the English soldiers. The narrator heard yelling and found Herncastle in a palace room, holding the Moonstone dagger, covered with blood. Two dead Indians lay at the door and at Herncastle's feet was a dying Indian who proclaimed, "The Moonstone will have its vengeance yet on you and yours!"

In the ensuing chaos, the narrator did not have an opportunity to speak with Herncastle until the following morning. Herncastle denied that he killed the Indian and said nothing of the Moonstone. The narrator has not enough evidence to publicly accuse him but writes this narrative "for the information of the family only." The narrator feels slightly superstitious about the Moonstone and believes that Herncastle will regret having stolen the diamond.

First Period, Chapter I

The First Period is narrated by Gabriel Betteredge, the House-Steward at Julia, Lady Verinder's estate. The date is May 22, 1850, and Franklin Blake, Lady Verinder's nephew, has just asked Betteredge to narrate the events surrounding the loss of the Indian Diamond at Lady Verinder's Yorkshire house in 1848. The narrative is to serve as a record of the facts, to clear the characters of innocent people who have been suspected in the theft. Blake has enlisted the people connected with the Diamond to narrate the events "in turn—as far as our own personal experience extends, and no farther."

Betteredge agrees to write the narrative. Before he begins he has been consulting Robinson Crusoe for prophecy and guidance. For many years, Betteredge has always consulted the novel in times of need. The novel now warns of the folly of beginning a task without knowing how difficult it will be. Betteredge worries about the difficulty of remembering and narrating all of the events surrounding the Moonstone and its theft.

First Period, Chapter II

Betteredge lovingly describes Lady Verinder, who was formerly Miss Herncastle, the youngest of three sisters. Betteredge first went into service as a pageboy to Lady Verinder's father. When Lady Verinder married the late Sir John Verinder, Betteredge went with them to serve as bailiff to the contented couple.