A pawnbroker named Jabez Wilson is duped into leaving his shop every day for four hours plus traveling time so that his new assistant, who is a notorious criminal described as "the murderer, thief, smasher, and forger," can work on a tunnel from Wilson's cellar to the cellar of a nearby bank. Wilson happens to have unusually bright and thick red hair, which gives the assistant, whose real name is John Clay, the idea of inventing an entirely fictitious "Red-headed League," supposedly established by an American philanthropist, which pays members four pounds a week for the nominal work of copying the Encyclopedia Britannica in longhand. A clerk in Arthur Conan Doyle's time typically earned a pound a week, so four pounds a week for simple copying work was a magnificent salary, especially since it only required four hours a day at a time when clerks were working ten hours a day. After eight weeks, Wilson finds the office locked and a sign on the door reading that the Red-headed League has been dissolved. This is the "back story."
The irate and mystified Wilson goes to Sherlock Holmes, who agrees to look into the matter. Holmes soon establishes that the assistant is really John Clay and therefore must be planning a crime of major importance. When Holmes sees that there is a bank located just around the corner, he is sure that Clay is getting Wilson out of the way so that he will be free to work on a tunnel. The fact that the phoney Red-headed League has been dissolved shows that Clay is planning to commit his burglary soon. It happens that 30,000 pounds worth of French gold is being temporarily stored in the cellar of the branch bank.
In the dramatic conclusion, Holmes is waiting in the dark with his friend Dr. Watson, a police inspector, and Mr. Merryweather a bank director when Clay and his henchman break through the bank's cellar-flooring, and both men are arrested.