However, the American Indians refused all offers and would not relinquish ownership of the land. When the negotiations failed, the federal government ordered all tribal members to return to their reservations.  Those who did not comply with the order were to be considered as “hostile.” 

In same year, a miner named John B. Pearson found gold in a narrow canyon in the Northern Black Hills. This canyon became known as "Deadwood Gulch," because of the many dead trees that lined the canyon walls. According to Colonel Richard I. Dodge, there was an estimated 800 white men mining the Hills at this time.

In the spring of 1876, U.S. Army troops were assembled to round up all hostiles and return them to their reservations by force, if necessary. In response, Hunkpapa Sioux leader and medicine man Sitting Bull summoned 10 tribes of the Sioux, plus the Arapaho and Northern Cheyenne, to his camp in Montana Territory to discuss their options.  By this time, the gold rush was full blown and it was estimated that approximately 10,000 white settlers populated the Hills.  Mining camps were established near Custer, Hill City and Deadwood. As old claims played out, new ones were found and towns died or were born almost overnight.

The town of Deadwood was established in 1876 and the mining camp was soon swarming with thousands of prospectors searching for an easy way to get rich. At first, the settlement was made up of tents and shanties, but as the population grew these were replaced with brick and wooden structures and false front businesses.  Fortune struck Fred and Moses Manuel, who claimed the Homestake Mine, which proved to be the most profitable in the area.  Through 1901, the Homestake produced $100 million in gold, and continued to operate for the next century, until it finally closed in 2001.

Although the Manuels had been lucky, there were hundreds of others that were not so fortunate. Though most of the early settlers of Deadwood were gold miners, the lawless region naturally attracted a crowd of rough and shady characters.

Like many towns of the American West, these particular individuals made the early days of Deadwood rough and wild. A mostly male population eagerly patronized the many saloons, gambling establishments, dance halls, and brothels, which were considered legitimate businesses and were well known throughout the area.  Ninety percent of the female population of Deadwood were prostitutes.  The new mining town averaged one murder per day in that first year.