At the outset of the novel, Sherlock Holmes receives a message from Fred Porlock, an agent to Professor Moriarty. Porlock occasionally sends Holmes insider information. Moriarty is blameless in the eyes of the law, but Holmes knows him to be "the controlling brain of the underworld." Together Holmes and Watson decipher Porlock's message as indicating that a man named John Douglas residing at Birlstone is in danger.
Inspector MacDonald of Scotland Yard calls upon Holmes to ask for his help and informs him that Mr. Douglas of Birlstone Manor House had been murdered that morning. Sherlock Holmes tells MacDonald that since he received an alert from Porlock it is probable that Professor Moriarty's influence exists in the matter. MacDonald reminds Holmes that the professor is an educated and well respected man. Holmes informs MacDonald that although the Professor's salary is seven hundred pounds a year, he owns a painting worth over forty thousand pounds, and the Inspector agrees that this is suspicious.
Holmes, Watson, and MacDonald travel to Birlstone village in Sussex. John Douglas was murdered at around midnight and had been shot in the head. The house is an old manor with a moat and drawbridge. A man named Cecil Barker was staying at the house on the night the murder took place and was a regular guest of Mr. and Mrs. Douglas. A sawn-off shotgun was found at the scene. It appeared to have been fired at close range which caused the head to have been completely blown to pieces.
Cecil Barker claims that he was upstairs in his room when he heard the shot and rushed downstairs. The drawbridge was up at this time and Cecil claims that he lowered it in order to admit help. There is a mark of blood upon the window sill where someone seems to have entered. Cecil says that he thinks the intruder got away by wading through the moat but has no explanation for how the assailant entered the house in the first place, unless he entered before that time and waited in the house. A card lays beside the body with the initials V.V scrawled in ink upon it. A small branded mark is seen on the man's arm but it has not been made recently. Douglas' wedding ring appears to have been taken from his hand, which seems indicative since no others rings were taken.
The police speculate that the murderer must have escaped across the moat, but if this was so then the question of how he has so far eluded the police when all his clothes were wet as he walked through the town is a mystery. From interviews with the people in the house more details about the events are established. Cecil Barker heard the shot, rushed down from his bedroom and entered the study and upon seeing Douglas murdered he rang violently on the bell. The servants and Mrs. Douglas all rushed to the scene. Mr. Barker persuaded Mrs. Douglas to return to her room, which she did. Holmes mentions to Watson that he thinks it was strange for Mrs. Douglas to have shown so little outward emotion and not to have rushed to her husband's body.
Cecil Barker says that he believes a secret society of men pursued Douglas and that this fear for his life is what prompted him to live in such a quiet area of England. Mr. Douglas married his wife when he came to England five years previously. He had been married before and that first wife died of typhoid. Douglas had met and worked with Cecil Barker in America for a time and then suddenly left for Europe. Both Cecil Barker and Mrs. Douglas were aware that some danger overhung Douglas and that this danger was connected with some episode of his life in America. Mrs. Douglas says that she had heard her husband mention "The Valley of Fear".
By studying the soles of Cecil Barker's slippers, Holmes ascertains that Barker used the sole of his own shoe to make the mark on the window sill so as to give the appearance that someone exited that way. Back at their lodgings in the village, Holmes tells Watson that Cecil Barker and Mrs. Douglas are certainly lying but that why they are lying is not yet clear. When a shotgun is fired at close range, the sound is muffled. The housekeeper heard what she described as a door slamming half an hour before the alarm was raised. Holmes believes that what the housekeeper actually heard was the shot fired when the murder really took place. White Mason, the Sussex detective, and MacDonald report that they have traced a bicycle found on the grounds of the house to an American staying at a guest house. It seems likely that he was the assailant since the gun used in the murder was of an American make, but there is no sign of the man.
Holmes tells MacDonald to write to Cecil Barker and inform him that the police intend to search the moat the next day. That night Holmes, Watson, MacDonald and White lay in wait outside Birlstone Manor and see Cecil Barker fish something out of the moat. The four men rush in and surprise Cecil; the bundle he has fished from the moat turns out to be the clothes of the missing American connected with the bicycle. It was weighted down with a dumbbell, one of a pair, and whose absence from the home Holmes had previously noticed. Barker refuses to explain the situation. At that moment, Mr. Douglas appears, alive and well. He hands Watson a written account called "The Valley of Fear", which he says explains the early part of his story and why he ended up being hunted in such a desperate way.
Douglas explains the recent events. He had spotted an enemy of his, Ted Baldwin, in the area and expected an attack. The next day he was attacked in his study. The assailant attempted to shoot him, but Douglas grabbed the gun first and in the struggle between the two men Baldwin received a shot to his face. With Cecil's help Douglas dressed the man in his own clothes and disposed of Baldwin's suit in the moat. He put his rings on the man's fingers except his wedding ring which he could not get off.
The card was the mark that Baldwin had brought with him and intended to leave on Douglas' body; V.V stood for Vermissa Valley. Douglas explains that the branding mark was that of a society to which both he and Baldwin belonged. Since they both bore the mark on their arms, this would make it likely that the bodies could not be told apart since Baldwin's head was destroyed utterly by the shot.
Since the time of the murder, Cecil and Mrs. Douglas had covered for Douglas who had been hiding in the house. The report Douglas gives to Watson explains how he came to be hunted so viciously. Douglas' real name is Birdy Edwards and he was at one time a detective with Pinkerton's from Chicago. Edwards had infiltrated a dangerous gang in Vermissa Valley, which had become known as the Valley of Fear, and brought them to justice. Edwards' life had never been safe since some of the criminals who had escaped the death penalty were released from jail. Edwards had moved around from place to place. His first wife Ettie, whom he had met in the valley, died. He then met Cecil and the two made a fortune in business together.
Hounded once again, Douglas disappeared and made for England, where he met and married his second wife. Holmes urges Douglas to leave England and warns that a new threat, greater than all those of his past, now hangs over him. Douglas takes this advice but is mysteriously lost overboard on the vessel bearing him and his wife to Africa. Holmes is convinced that Moriarty was consulted by the men who hunted Douglas and had assisted them in ending Douglas' life. Holmes intends to bring Moriarty down but warns Watson and MacDonald that it will take some time to achieve.
Holmes decodes a warning from Porlock, an informant against arch-criminal Moriarty, for "Douglas" resident five years at "Birlstone". Scotland Yard's MacDonald asks them to investigate a corpse with the same look and circle-in-triangle brand on the forearm as Birlstone owner Douglas. The head was blown off by an American-style sawed-off shotgun. Apparently, an intruder dropped a card marked with "VV341" and left across a shallow moat. Watson observes the bereaved English wife and best male friend in unusually good spirits. When Holmes pretends the moat will be drained, the conspirators retrieve a missing dumb-bell weighting down the visitor's clothes beneath the water. Douglas comes out from hiding, to explain he killed the assassin Baldwin in self-defence; the plan was to disguise the body, faking his own death, saving him from more attacks by criminal survivors of Vermissa Valley. He hands Dr. Watson the following account.
II. The Scowrers - 20 years before
Young McMurdo gains a reputation as a tough counterfeiter and Freemen Lodge member on the lam from murder charges in Chicago. In the Vermissa Valley coal mining area, McGinty rules Scowrers, the local Lodge 341 who extort, murder, and exchange vicious deeds with nearby Lodges, and whose brand is a circle inside a square. Pretty Ettie prefers McMurdo to nasty Scowrer Teddy Baldwin, and wants to flee, but they wait several months. When word comes that Pinkerton sent Edwards, McMurdo gathers the ringleaders in one room, and springs his trap on them, surrounded by the law. Although the worst were hanged, after ten years the surviving villains were freed. They chased down McMurdo-Edwards-Douglas, despite his changes of name and venue. McMurdo had married Ettie who died in California, where he made a fortune.
Two months later, Mrs. Douglas telegrams from South Africa. Her husband was lost en route, overboard in a gale. Holmes had warned them to flee England, and blames Moriarty.