The Rise and Fall of Diamonds

by Edward Jay Epstein

  The sixth rule: Diamonds must never be sold into "weak hands" In order to maintain the illusion that diamonds never crease in value, price wars and cutthroat competition must be avoided at all costs. De Beers' clients are prohibited from selling their diamonds to any wholesalers or retail Jewelers who undercut prices at the retail level. If De Beers finds any wholesalers or retailers engaging in what it considers to be destructive competition, the manufacturers who get their diamonds at the sights are expected to immediately cut off the transgressor's supply. In this respect, De Beers' clients are, forced to be silent partners with De Beers in maintaining an orderly retail market.

  The penalty for the violation of this rule is subtle but effective. A client who sells diamonds to "weak hands," or anyone of whom De Beers disapproves, finds that the mix of diamonds in his box becomes progressively less profitable for him. For example, one manufacturer, who had been a client of De Beers for two decades, had sold some diamonds in 1977 to an Israeli diamond dealer who was considered by De Beers to be a dangerous speculator. He then found that his box, with a price tag on it of over $1 million, contained mainly "rubbish," as he called it. He realized that in deciding whether or not to accept it he had a Hobson's choice. If he took these diamonds, he would lose several hundred thousand dollars processing them. On the other hand if he turned down the box, he would lose his source for future diamonds and be forced to close his cutting factory. It was a painful decision. Finally, he nodded to his broker that he would accept the diamonds. On the way out, he passed Monty Charles, who shook his hand amicably and asked how he liked the merchandise he had received. When the client expressed some disappointment, Monty Charles reportedly answered, "Perhaps you've been slightly naughty, but let's see what we can do next time."

  Aside from the penalties that it can impose at will, De Beers also provides positive incentives to clients who support the system-the "carat and schtick" approach, as one Israeli client Joked. Not only can the assortment of diamonds be arbitrarily upgraded for a favored client but Monty Charles can also add very lucrative "large stones" to a box. These larger diamonds can usually be resold for a windfall profit.

  The sights in London thus are not merely occasions for major gem manufacturers to select the uncut diamonds that they wish to purchase but an integral part of the mechanism through which De Beers establishes and maintains the value of diamonds. Through these ten events a year De Beers extends its control from the diamond mines of Africa to the cutting factories of Belgium, Israel, India, and the United States. And through its clients-whose fortunes depend heavily on the contents of the shoe boxes they receive-De Beers is able to monitor and regulate the flow of diamonds that pass through the world pipeline into the retail market. The stakes are undisputably high in this game.

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  The Empire Builders

  In July of 1980, a black crowd armed with whips and mallets toppled the bronze statue of Cecil John Rhodes from its pedestal in Salisbury, Zimbabwe. The caption of the Associated Press photograph of the event read, "Symbol of Colonialism Toppled in Zimbabwe." Rhodes, after all, was the only man in history to have two nations and a federation named after him-Rhodesia (now Zimbabwe), Northern Rhodesia (now Zambia) and the Rhodesian Federation (which had included Malawi, Zambia and Zimbabwe). In less than ten years, under the royal charter granted to him by the British government, he had colonized millions of square miles of the richest part of southern and eastern Africa. This territorial empire proved ephemeral- not even his bronze statue lasted out the century. He created another empire, however, De Beers, which endured.

  Rhodes arrived in the port of Durban in South Africa in September of 1870. He was then a gangly boy of seventeen with a long face that made him appear taller than he was. He spoke with a squeaky voice that disconcerted other passengers on the boat. He had left England and traveled to South Africa because of his failing health. He had a collapsed lung and a weak heart, and his doctor predicted he would not live to the age of twenty-one. His father, a poor vicar in Hertfordshire, sent him on this voyage so that if he did not miraculously recover. he would at least die peacefully in a warm climate. His total stake in the world, a gift from his aunt, was two thousand pounds.

  Even with meager resources, Rhodes was possessed by a dream. He wanted to extend the British Empire throughout the world. In a will he drew up several years later, he directed that whatever money he ha acquired in his life be used to form a secret society that would attempt, among other things, to bring the United States back under British rule. He also envisioned building a railroad from Capetown, at the southern tip of Africa, to Cairo, at the other end of the continent. The dream railroad, like all his other schemes, was only a means to an end, as he had no real interest in wealth. The end was colonizing Africa, from Capetown to Cairo, for the British empire.

  As he believed that his life was not destined to be a long healthy one, he set out immediately to acquire the capital to realize his grandiose ambitions. A year earlier, diamonds had been discovered near the Orange River on the edge of the great Karoo desert in South Africa. Never before had diamonds been found in Africa, and fortune hunters from all over the world were converging on this spot. His older brother Herbert, who was a prosperous cotton grower in Natal province, had already staked out a number of small claims.. Rhodes decided to join his brother in the diamond rush.

  He hired an oxcart for the rugged trip to the diamond fields, which took a month of traveling across open veldt. He bought a pick, shovel, and other prospecting gear. And, as he was preparing himself for the entrance examination for Oxford, he took along with him a set of the Greek classics.

  His brother's claims were on a farm owned by two brothers, D.A. and J. N. De Beer. The De Beer brothers were Boer settlers, interested in farming, not diamonds. They sold off their land to the swarm of prospectors and moved on, leaving behind only their name: De Beers.

  When Rhodes arrived at the De Beers farm, he found the diamond rush in full frenzy. After setting up his canvas tent, he wrote to his mother, "I would like you to have a peep ... from my tent door at the present moment. . . . Imagine a small round hill, at its highest point only 30 feet above the level of the surrounding country, about 180 yards broad and 120 feet long; all round it a mass of white tents." He added, "It is like an immense number of ant heaps covered with black ants as thick as can be; the latter represented by human beings."

  This encampment, which was occupied by some 50,000 fortune hunters, was the second most populous "city" in the whole subcontinent of southern Africa. Within the next couple of years, the tents were replaced by corrugated iron shacks brought by ox cart from Capetown, and the city was named Kimberley in honor of Lord Kimberley, the British secretary of state for the colonies.

  For Rhodes, however, Kimberley remained a human anthill. When his brother's claim yielded only meager results, he decided that immediate profits were not in mining but in servicing the needs of the multitude of "ants" who were pouring into Kimberley by the thousand each week. He began his enterprise by importing ice cream, and then jugs of water, which he sold to the thirsty diggers. In doing so, he realized that water was a two-fold problem for the claim owners. On the one hand, they needed an ever-increasing amount of fresh water for their black laborers as they dug deeper into the ground for diamonds. On the other hand, the seepage of ground water into the mines, as the diggers approached the water table, was threatening to collapse the dirt walls of the mines. There were thousands of adjacent mines surrounding Kimberley, and the owners needed a means of pumping the water out. Rhodes now saw an opportunity for making his fortune.

  He reckoned that soon a steam-powered pump would be needed to suck the water out of the mine. No such machine existed in Kimberley. In fact, there was only one steam pump in all of South Africa. Seizing the opportunity, Rhodes invested all the money he had in buying it.

  No sooner had Rhodes' steam pump arrived in Kimberley than a torrent of water flooded the Kimberley Big Hole mine. As the walls began t
o collapse, the thousands of black workers in the mine had to be pulled out of the mine with ropes. The individual claim owners, who each owned various sections of the floor of the mine, desperately needed Rhodes' pump and they had no choice but to pay whatever he demanded.

  Rhodes reinvested the money he made in ordering bigger steam pumps from England. He then ruthlessly drove whatever competition existed out of his the pumping business~ his competitors charged him with sabotaging their pumps~ and established a water-pumping monopoly in all mines around Kimberley.

  As he progressively raised the charges for his pumps, the mine owners, and even mine syndicates, could not afford to pay him in cash. Instead, he got from them a share of the mines. By the age of twenty-seven, he was the largest mine owner in Kimberley. Although now exceedingly wealthy, he had little interest in personal amenities. He shared a tiny one-room shack with a business associate. He wrote that the "chief good in life" was not for him a happy marriage, great wealth or interesting travel, but "the absorption of the greatest portion of the world under [British] rule." In between his sharp dealings in Kimberley, Rhodes managed to find time to take a degree at Oriel College at Oxford. Here John Ruskin's lectures on the virtues of imperialism renewed his ambition to colonize Africa.

  Returning to Kimberley, he merged his interests with two huge miming syndicates to form the De Beers Mining Company. He held the controlling block of stock in this new entity and applied to the Colonial Office in London for a charter. It was granted in 1880, and was unlike any other charter ever given to a mining company. Under its terms, Rhodes' company was not confined to mining. It could build railroads, lay telegraph wires, annex territories, raise armies and install governments. Since the East India Company had been established in the seventeenth century, no company had ever been granted such unrestricted powers. It was all part of Rhodes' dream of empire.

  As the Kimberley mines kept spewing out tons of diamonds, the price of diamonds fluctuated wildly, and then, as diamond merchants were unable to absorb these diamonds, the price dropped to a few cents a carat. Mines closed, and claims were abandoned. Rhodes wrote in a letter that diamonds were on the verge of becoming a "frightful drug" on the market unless production was brought under control. To accomplish this, he proposed a new grand design for Kimberley: the amalgamation of all the other mining companies into his De Beers Company. Most of the other mine owners were willing to be bought out by Rhodes. One was not. His name was Barney Barnato.

  Barnato, like Rhodes, was an English subject. He had been born on July 5, 1852, in the East End of London. By coincidence, it was the same day, but one year later, that Rhodes was born; but here the similarity between the two men ended. Barnato came from a Jewish slum, and instead of attending school, he had to eke out a living on the street selling rags and performing magic tricks for children. His real name was Barney Isaacs, but he changed it to Barnato so that he could join his brother in a music hall act. The name stuck.

  Barnato arrived in Kimberley in 187 3 - He was twenty-one years old, and had in his possession thirty pounds in English currency and forty boxes of defective cigars. He proceeded to sell the cigars to the diggers in the diamond fields. He also gave boxing exhibitions, performed in a cabaret and traded everything from feathers to garden vegetables. The most profitable trading commodity proved, however, to be diamonds.

  Barnato bought diamonds for cash from the diggers and quickly resold them. With his profits, he bought up a number of unproductive claims on the floor of the Big Hole. Then, to everyone's amazement, these claims began yielding extraordinary quantities of diamonds, even when rain storms made working the adjacent claims impossible. Barnato was accused by other mine owners of having salted his claim with diamonds that he had illegally bought from smugglers and thieves. But the charges were impossible to prove.

  Whatever the provenance of his diamonds, Barnato continued to expand his production. With the money he sold them for, he began buying up, piece by piece, the patchwork of claims on the floor of the Big Hole. When cave-ins made it impossible to dig any deeper in the Big Hole, mine owners rushed in panic to sell their claims. Barnato continued to buy these pieces of the jigsaw puzzle. Then, in 1883, he gambled on sinking an underground shaft- the first ever attempted for diamond mining. It worked, and the claims he had bought for a pittance became worth a fortune. just as Rhodes had gained control of the De Beers mine, Barnato got control cr most of the Kimberley Central mine.

  Rhodes and Barnato, both in their mid-thirties, by 1887, controlled the world's two giant diamond mines. A confrontation between these enormously ambitious men became inevitable. Rhodes, if he was ever to have his empire, had to buy out Barnato. He made the first move, attempting, with financial backing from the Rothschild bank in London, to buy one of the few pieces in the Kimberley mine that Barnato did not own. He offered the then staggering sum of 1,400,000 pounds to the French financiers who owned it, not because the diamonds in it were worth that sum but because it would paralyze Barnato's effort to consolidate the Big Hole into a single mine.

  When Barnato received word of Rhodes' bold offer, he himself offered 1,750,000 pounds to the French financiers for this crucial section. He had no choice but to outbid his rival.

  Rhodes, at this point, decided to offer Barnato a deal that would seem too lucrative for him to refuse. Instead of bidding up the price, which would only benefit the French investors, Rhodes suggested that Barnato withdraw his bid. In return, Rhodes agreed to buy this section of the mine at the lower price and then immediately resell it to Barnato for 300,000 pounds and a one-fifth interest in Barnato's Kimberley Central mine.

  Barnato immediately accepted the offer. It permitted him to acquire the section for 1,450,000 pounds less than he had offered, and with it, he could operate the mine as a single entity. He realized that giving Rhodes a one-fifth interest in his mine would provide him with a bothersome wedge into his company, but he assumed that he and his close associates still owned a sufficient number of shares to make it impossible for Rhodes to attempt to gain control. Barnato made the fatal mistake of underestimating Rhodes' ambitions.

  To Rhodes, the deal was only the opening gambit in his war for control. ~You could never deal with obstinate people until you got the whip hand," he explained to an associate at the time. The one-fifth interest was to be his whip.

  Rhodes set about asking the most powerful bankers in Europe, including Rothschild, Jules Porges, and Rodolphe Khan, to help him buy enough stock in Barnato's company to allow him to merge it into his company. He argued that as long as there were competing diamond mines, the market would continually be flooded. Then prices would fall to a pont that the public would realize that diamonds had no intrinsic value.

  The bankers were quickly persuaded that Rhodes was right: Diamond mining would only remain profitable if it were done by a monopoly that could systematically restrict the supply. They not only agreed to use the stock that they and their clients held in Barnato's mine to bring about the merger but they also advanced Rhodes money to buy up shares of Barnato's stock on the open market.

  The rest simply required an exercise in stock manipulation. Rhodes first drove the price of diamonds down by dumping De Beers~ inventory of diamonds onto the market. The price plummeted, and as Barnato's associates unloaded their stock, Rhodes bought it. When no more stock was available, Rhodes and his backers began again bidding up the price, which tripled in three months. By the time Barnato realized that Rhodes was attempting to buy up his company, it was too late. By March of 1888, Rhodes and his associates had acquired the additional 30 percent they needed for control of the Kimberley Central mine.

  Barnato had no choice but to acquiesce in the proposed merger. He met Rhodes at the Kimberley Club, and over an amicable lunch they worked out the terms of the consolidation. Barnato would exchange his stock in the Kimberley Central mine for stock in De Beers Consolidated Mines, as the new company would be called. This would make Barnato the largest single shareholder, though Rhodes, with h
is bankers and allies, would be firmly in control of the new company. Barnato would also be appointed one of four life governors of the monopoly-a position he would hold as long as he lived. The two men then shook hands on the deal. Barnato told him, Rhodes later noted, "You evidently have a fancy for building an empire in the north and I suppose we Must give you the means to do so."

  There were still, however, some dissident shareholders in I lie Kimberley Central Company who opposed the merger. They sued Barnato and Rhodes, claiming in court that the new company would no longer be a mining company but an adventure in imperialism. They argued that under the De Beers charter the company might "undertake warlike operations" in central Africa.

  To prevent further litigation, Rhodes and Barnato, who between them controlled four-fifths of the stock in the Kimberley Central mine, simply liquidated the company and sold its assets to De Beers. The 5,338,650 pound check that De Beers paid for the assets was framed and hung on the wall of the De Beers boardroom, in which it is still conspicuously displayed.

  Rhodes then proceeded to buy up two other small pipe mines in the Kimberley area-the Dutoitspan and Bulfontain. By 1890, he controlled more than 95 percent of the world's diamond production. The next order of business was restoring the balance between world supply and demand. Rhodes believed that the demand for diamonds was determined by the number of "licit relationships," as he termed engagements, between the sexes each year. By estimating the intended marriages each year in the United States, which was then the main market for diamonds, Rhodes believed it was possible to project the market for diamonds each year. In accordance with this "licit relationship" calculus, he began to reduce production in Kimberley from three to two million carats a year.