Due to his many enterprises, Captain John Sutter was always in need of more lumber. Since lumber was abundant in the surrounding hills, he and his employed contractor, James Marshall came up with the idea to build a saw mill in the area. They would then haul the milled lumber a short way to the American River. From there, they would raft the product down the American River to the Sacramento River and then on down to San Francisco to market.

On a rainy afternoon in early January 1848, as John Sutter sat in his office writing a letter to a 'relation in Lucerne', James Marshall unexpectedly burst in on him and appeared to be in a highly 'agitated' state. Marshall explained to Capt. Sutter that he had some 'interesting news' and asked if they could meet in private. Once they were alone, Marshall went on to explain that he had disengaged the mill wheel, as Sutter had requested. This was being done so that all of the dammed up water at the mill could be released to find a natural drainage path course down a trail race. After the water had drained off, Marshall was walking along the muddy bank when the glint of something caught his eye, He then spotted several other glittering fragments in the mud. After relating his story to Sutter, Marshall pulled a rag from his pocket which contained approximately two ounces of gold.

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