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Literally speaking, the policeman is commenting that Bob apparently has done well, at least financially, out West. Twenty years previously, Bob had left New York to make his fortune, heading to the West, which he describes as "a pretty big proposition," and in which he "hustle(d) around over...pretty lively" during his time there. Bob is obviously very rich, as indicated by the "handsome watch...set with small diamonds" which he wears. It is clear that Bob "did pretty well out West," as the policeman says.
Metaphorically speaking, the West stands for the American Frontier. During the time that O. Henry writes, the frontier, which had always been looked upon as a place of promise and freedom, was disappearing, as more and more people from the East Coast headed West, in pursuit of the opportunity to make something great of their lives. It is from this phenomenon that the old adage, "Go West, young man," derives, and that writers like Mark Twain explore in books like Huckleberry Finn, in which the central character longs to "light out for the Territories" out West, to escape the confines of civilization. Bob has indeed done well for himself in the West, but he has done so illicitly, having earned for himself the nickname "Silky Bob," and having gone against the law in Chicago. Bob has indeed taken advantage of the opportunities and freedoms he has found in the West, and his wealth attests to the fact that he did "pretty well" there materially, but in the process, he has changed from "a good man to a bad one." Bob did not handle freedom well, and he is now under arrest for his corruption.
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