In The Great Gatsby, Nick is primed not to believe in what Gatsby says because of the aura of mystery—which Nick believes might be a little "sinister"—that swirls around him. At the first party of Gatsby's parties that Nick attends, he hears wild rumors about Gatsby as criminal, spy, or murderer. The source of his vast wealth is unknown.
Further, his own probings of Gatsby bring up lies. For example, in the following exchange, Gatsby exposes himself. After Gatsby says "by God's truth" that he is from a wealthy midwestern family, Nick asks,
“What part of the Middle West?” [...]
“San Francisco.” [Gatsby says]
As the conversation goes on, Gatsby tells more lies:
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 had happened to me long ago.”
With an effort I managed to restrain my incredulous laughter. 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.
The above is a telling passage. As Nick's desire to laugh indicates, as well as his image of Gatsby chasing a tiger through a Paris park, nobody big game hunts in the capitol cities of Europe. As Nick realizes, Gatsby has fashioned his own identity based on romantic stories he has heard or seen in movies.
Gatsby's stories don't add up, but like a good con artist, there are enough elements of truth in what he says that he can't be entirely dismissed. He was in Europe during the war, for example, and did spend some time, as he claims, at Oxford.
Despite Gatsby's untruths, Nick is nevertheless seduced by Gatsby's charm and the audacity of his self creation. And as Nick shows in the novel, none of the major characters are entirely truthful.
Although Jay Gatsby has put together an elaborate backstory, he hasn't quite been careful enough. There are just too many inconsistencies in the story he spins about his life for it to be taken seriously. Gatsby is supposedly from the Midwest, but on one occasion, he says he's from San Francisco.
Gatsby's mannerisms also are a dead giveaway. When he's telling Nick about his life, there's something stilted and artificial about his manner of speaking, as if he's just acting out a role. In fact, this is exactly what he is doing. The wealthy upbringing, the extensive tour of Europe, the Oxford education, it's all complete fantasy.
It's not just Nick who suspects that Gatsby isn't telling the truth. Jordan Baker, herself no stranger to dishonesty, believes that he lies about his past. It takes a thief to catch a thief, as they say, and so it's not surprising that someone with a reputation for dishonesty such as Jordan should easily spot the same unfortunate character trait in others.
Even so, none of this ultimately matters to Nick. He's been sucked so deeply into Gatsby's opulent, romantic fantasy world that the flimsy backstory doesn't change how Nick regards this fascinating, mercurial figure.
Because people keep hinting that there's more, For example, Jordan is suspicious of Gatsby. Gatsby himself sometimes contradicts his own story. For instance, he tells Nick he is the son of wealthy Midwesterners, but later says he comes from San Francisco. Through Gatsby Nick meets Wolfsheim, a mobster - seems like strange company. there are rumors of "drug stores" that are selling bootlegged liquor. Tom when he confronts Gatsby in Nick's presence challenges Gatsby's claims to such things as having attended Oxford.
Gatsby tells Nick the "story of his life" one July morning on their drive into New York. It is replete with details about his wealthy family background, Oxford education, wanderings throughout all the European capitals, and extraordinary heroism during World War I. Nick questions the veracity of Gatsby's tales for several reasons. He knows Jordan Baker believes Gatsby lies about his past. Nick spots some inconsistencies himself, such as Gatsby's citing San Francisco as the place of his Midwestern birth. Gatsby's use of language is stilted and artificial, seeming to be an attempt to speak "upper class." His manner also seems deceptive to Nick:
He looked at me sideways--and I knew why Jordan Baker had believed he was lying. He hurried the phrase "educated at Oxford," or swallowed it or choked on it as though it had bothered him before. And with this doubt his whole statement fell to pieces . . . .
At one point, Nick has to make a conscious effort to keep from laughing at some of Gatsby's wilder assertions. Just as Nick is ready to dismiss Gatsby as a complete fraud, Gatsby produces a war medal and a photograph that seem authentic and serve to support Gatsby's claims. These souvenirs draw Nick into Gatsby's romantic past, at least for the moment. Looking at Gatsby's mementos, Nick gives up his skepticism: "Then it was all true."