Gatsby then mentions that he lived "like a young rajah," hunting big game and collecting jewels "in all the capitals of Europe." Nick finds Gatsby's fabricated background story so ridiculous that he struggles to suppress his "incredulous laughter." It is obvious to Nick that Gatsby is lying, and his story resembles random adventure tales he seems to have pieced together. Nick can tell that Gatsby has a tenuous grasp of geography from his San Francisco comment and understands that hunting big game and collecting jewels are not European activities. Gatsby's entire background seems ludicrous, and for a moment Nick believes he is joking with him. However, Nick is the consummate gentleman and manages to suppress his laughter as a polite gesture and humors Gatsby by continuing to listen to his story.

Nick is not a cruel person who is restraining laughter over Gatsby saying he has been trying to forget something sad that happened years ago. Instead, Nick is trying to suppress the laughter that burbles up as Gatsby tells him his fabricated version of his life story.

Nick wants to laugh because the story is so ludicrous. First, Gatsby insists he comes from a wealthy family in the midwest. When Nick, who is from the midwest himself, asks where, Gatsby says San Francisco. Since San Francisco is on the Pacific seaboard, very far from the midwest, Nick knows Gatsby is lying—and also knows Gatsby is not educated enough to realize his mistake. (In other words, he is no Oxford graduate.)

At the moment Nick has to choke back his laughter, Gatsby has just told him about drowning his sorrows through big game hunting and searching for rubies in the capital cities of Europe. These are activities associated with India (or possibly Africa), not European capitals. As Nick notes, there is not much big game running around Paris, and one isn't likely to find secret caches of rubies hidden there either. What Gatsby is doing is repeating, with some errors, what he has read in cheap dime store adventure stories.

The passage shows the stark class and educational differences between Nick and Gatsby. Nick is a genuinely well-educated Yale graduate who knows his way around the world. Gatsby is inventing himself as he goes along and lacks the educational or class background to do it convincingly.

It is a credit to Nick that he can transcend his snobbery and come to see the tragic grandeur in Gatsby's pursuit of his dream of Daisy. After all, as Nick himself notes early in the novel, it would have been easy for him to despise Gatsby—but he doesn't.

Nick has to restrain his laughter because Gatsby's story is so outlandish and ridiculous and, seemingly, impossible. At first, Nick "suspected that [Gatsby] was pulling [his] leg," but he eventually becomes convinced by Gatsby's sincere countenance and tone that the man is not trying to be funny. It's as though Gatsby has concocted the most romantic story possible, cobbling together all kinds of scenarios concerning everything from a dead family from whom he inherited a "'good deal of money'" to tales of war heroism. He says that his family has come from the Midwest, but when Nick asks where, Gatsby tells him, straight-faced, "San Francisco": a city most certainly not a part of the Midwest! Gatsby has said that he's going to tell Nick "God’s truth" about himself, though one would have to be a total ninny to actually believe the details. Nick says that listening to Gatsby describe his so-called past "was like skimming hastily through a dozen magazines." It's like a fairy tale, full of ridiculous and incongruous details, that the listener is not supposed to question; it is so ludicrous that a grown man would present such crazy stories as his own that Nick must work to restrain his laughter.

Gatsby says this important quote to Nick in Chapter 4, when he tells Nick about the "truth" of his background so that Nick will not be taken in by the elaborate fictions he has heard about Gatsby and his rise to wealth. However, in spite of Gatsby's protestations of veracity, it becomes clear that Gatsby is merely spinning yet another fiction for the ears of Nick. Although Nick is not entirely sure, what clinches his belief that Gatsby is lying is the following phrase:

"After that I lived like a young rajah in all the capitals of Europe--Paris, Venice, Rome--collecting jewels, chiefly rubies, hunting big game, painting a little, things for myself only, and trying to forget something very sad that happened to me long ago."

Note the obvious rehearsed nature of this sentence. Firstly there is little "big game" in the cities of Europe, nor are there many rubies to be found, except in shops. Nick has to "restrain his laughter" because, as he says:

The very phrases were worn so threadbare that they evoked no image except that of a turbaned 'character' leaking sawdust at every pore as he pursued a tiger through the Bois de Boulogne.

Gatsby is so concerned to perpetuate the mystique that surrounds him and to downplay his humble origins that he shares this "truth" with Nick in confidence, only to spread yet more clichés and ridiculous ideas, and it is only later on that Nick finds out the real truth about Gatbsy's rise to wealth and fame.