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In the movie Gangs of New York, four people are about to be hanged.

One of them shakes hands with Bill, who purchases a necklace from him, and they even negotiate about the price from 1 dollar to 1.5 dollars. Why would someone about to die want to negotiate over a necklace?

When all are hanged, people in the audience applaud! Why would they do that in the event of people losing their lives?

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Because for them it was entertainment.

Historically, public executions were spectacles often witnessed by huge crowds

An Act of Parliament ended public hangings in Britain in 1868, but it took America nearly seventy more years to follow suit. In colonial times, says one account,

“Crowds of thirty thousand or more were expected to be at high profile hangings; viewing stands had to be erected to contain the throngs. Often chaos erupted out of these bloodthirsty crowds — a viewing stand collapsed at an execution in Cooperstown, New York, and killed two people.

Source

The Last Public Execution in America, says a book with that name, took place in Owensboro, Kentucky, on August 14, 1936, “when some 20,000 men, women, and children witnessed it.”

The script indicates the same intention...a holiday/entertaining atmosphre...

 The CROWD is in a carnival mood; HOT CORN GIRLS, STREET VENDORS,
  "HOKEY-POKEY" (i.e., ice cream) MERCHANTS, even BUSKERS, all add to the
  holiday spirit.

Regarding the sale of the prisoner's belongings, it's less clear. The implication is that the proceeds are retained by the persons actually conducting the execitions...since the bidding is started/controlled by the Assistant Hnagman in the script.

  ASSISTANT HANGMAN
  What am I bid for this coat? A coat of some wear but excellent cut...
  containing a rather remarkable pocket silk...

It's possible that the proceeds are then passed to the prisoners heirs but given the nature of the movie and the times I would suspect that this is not the case.

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    Bill the Butcher negotiated that purchase separately from the auctioning of the proceeds that you reference, so I'd guess the implied promise is that Bill will see that his family gets the money. If the Hangman's auction does not go to the family, then all the more incentive to accept Bill's offer. – PoloHoleSet May 17 '18 at 20:18

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