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Doctor John Watson steps into the home of his friend, the famous private detective Sherlock Holmes. Watson, the story’s narrator, finds Holmes deep in conversation with Jabez Wilson, a man who would be entirely unremarkable except for his blazing red hair. Holmes asks Watson to stay and lend his assistance, claiming that he has never heard a case as bizarre as Jabez Wilson’s.

Wilson reveals that he is a pawnbroker and has an assistant named Vincent Spaulding, who is working for half the usual salary to learn the business. Wilson says that Spaulding is a fine worker, although he is interested in photography and often goes alone into the basement of the shop to develop photos. About two months ago, Spaulding drew Wilson’s attention to an advertisement in the paper for an opening in the League of Red-Headed Men. According to Spaulding, the league is a foundation established by an eccentric and wealthy American to promote the interests of redheaded men by paying them to perform small tasks. Spaulding encouraged Wilson to apply, and the two went to the offices listed in the advertisement. After fighting through a crowd of redheaded men waiting outside, Spaulding and Wilson made their way to the manager, another redheaded man by the name of Duncan Ross, who promptly hired Wilson. The league paid Wilson to copy pages of the Encyclopedia Britannica, forbidding him from leaving the office for any reason during his four-hour shifts.

Wilson says that he worked for the league for eight weeks and was paid handsomely for his efforts. The morning on which the story begins, however, Wilson arrived at the offices to find that the Red-Headed League had been dissolved and that Duncan Ross was nowhere to be found. Wilson went immediately to Sherlock Holmes, hoping that Holmes could help him find out whether he had been the victim of a practical joke. Holmes asks Wilson a few questions about Vincent Spaulding and discovers that Spaulding came to work for Wilson only about a month before the whole mysterious affair began. Holmes tells Wilson that he will have an answer in a few days.

After smoking three pipes in a row, Holmes leaps up and asks Watson to accompany him to a concert. Along the way, they stop in front of Wilson’s shop, where Holmes thumps his walking stick on the pavement and knocks on the door to ask Spaulding for directions. After Spaulding and Holmes finish talking, Holmes tells Watson that he believes that Spaulding is the fourth-smartest man in London. Holmes also tells Watson that he saw on the knees of Spaulding’s trousers exactly what he wanted to see. Even though Watson is mystified by these remarks, Holmes refuses to explain them further and instead leads Watson around to a busy street behind Wilson’s shop. Holmes notices aloud that there’s a bank behind Wilson’s shop, and, finished for the day, he and Watson go to the concert.

After the concert, Holmes asks Watson to meet him at his office at ten o’clock that night, saying that a serious crime is about to be committed. Watson agrees but is entirely bewildered by Holmes’s actions. Watson notes that he and Holmes have seen and heard exactly the same information about the case but that Holmes seems to have arrived at some conclusions that he himself has failed to draw.

That night, Watson meets up with Holmes, along with two other men—a Scotland Yard detective named Peter Jones and a bank manager named Mr. Merryweather. Holmes says that the four men are about to have a run-in with John Clay, a notorious criminal. The men depart in carriages to Mr. Merryweather’s City and Suburban Bank—the same bank Holmes and Watson had discovered behind Wilson’s shop. The four men wait for an hour in the darkness of the cellar filled with French gold. Suddenly, they notice a light shining through a crack in the floor. The light gets brighter and brighter, until the crack finally widens and a man’s hand breaks through. The man climbs out of the opening the floor and begins to help another man through when Holmes and Detective Jones leap on the two men. They capture the first man, John Clay, also known as Jabez Wilson’s hardworking assistant, Vincent Spaulding. The other man escapes through the crack in the floor.

Later that night, Holmes tells Watson how he solved the case. Holmes realized from the beginning that the Red-Headed League was simply too preposterous to be real and that it must therefore have been a ploy to get Wilson out of his shop for a few hours every day. The fact that Spaulding was willing to work for so little money and spent a lot of time alone in the basement suggested to Holmes that Spaulding was doing something illicit in the cellar. When he noticed the bank nearby, Holmes had suspected that Spaulding was digging a tunnel to the bank. Holmes pounded on the sidewalk outside Wilson’s shop to determine whether the ground was hollow underneath, and he knocked on the door for directions so that he could see whether the knees of Spaulding’s pants were worn away. The fact that the league dissolved so suddenly suggested to Holmes that the robbery was imminent, and he was therefore able to make preparations and capture John Clay.

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