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The more rustic interior narrator, Simon Wheeler, is making sport of the more educated exterior - or frame - narrator. Wheeler's story is like a traditional tall tale where unlikely things happen. The exterior narrator doesn't pick up on this aspect of the story because he doesn't have a very good sense of humor. This is probably why he is being targeted by Wheeler in the first place!
For example, the exterior narrator sits quietly through the entire story even though it's outrageous; most people would be laughing. Wheeler just keeps ratcheting up the level of unlikelyhood to pull the guy's leg.
The purpose was to have a laugh at the expense of the more sophisticated Easterners who sometimes looked down on the mining camps in the West and, in general, those who lacked education and civilization.
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