The Rise and Fall of Diamonds

by Edward Jay Epstein

  Oppenheimer immediately understood the gravity of the situation. The syndicate could no longer afford to keep its stockpile intact, and if it placed even a small portion of the diamonds on the market, the price would totally collapse. He further realized that this could forever destroy the public's trust in diamonds as a store of value. He had only one alternative: to now take over the syndicate.

  Since Oppenheimer and his relatives owned shares in leading members of the syndicate, there was little resistance to the takeover. The subsequent exchange of stock in fact enhanced, rather than diluted, Oppenheimer's control of the monopoly. He put his younger brother Otto in command of the distribution arm in London, which was now called the Diamond Corporation. He then created the Diamond Trading Company, which took over the responsibility of the syndicate for allocating diamonds to manufacturers and wholesalers.

  World sales had fallen to practically nothing- a mere $100,000 worth in 1932- and Oppenheimer next moved to curtail the supply of diamonds. One by one, he closed all major mines in South Africa. Production fell from 2,242,000 carats in 1930 to 14,000 carats in 1933. He also closed the beach mines in Namibia. A confidential market analysis, commissioned by De Beers, noted, "The diamond market is exceedingly sensitive to adverse conditions and rapidly dwindles when such conditions are in the ascendent."

  Prices were plunging even after the cutback in supply. According to the same report, "During the years 1930 to 1932, there was a pronounced and steady decline in prices of approximately 50 percent."

  Oppenheimer was able to close down his own mines, but he could not prevent newly discovered diamond mines in the Belgian Congo and Portuguese Angola from continuing to produce diamonds. Even though there was no market for these diamonds, De Beers had to continue buying them up through its Diamond Corporation in London to prevent them from being dumped on the market. To finance these diamonds, De Beers issued bonds.

  By 1937, De Beers' stockpile of diamonds had grown to some forty million carats- which was, even in pre-Depression times, nearly twenty years' supply. Oppenheimer's empire, which had invested millions of dollars in borrowed money in these diamonds that could not be sold, was now itself on the verge of bankruptcy. According to one United States government report, Oppenheimer was even considering dumping several tons of these diamonds into the North Sea to prevent them from reaching the market in the event that his company was forced into liquidation by his creditors.

  Oppenheimer was saved from having to implement this radical solution to the oversupply problem by the invention of the diamond grinding wheel. In essence, the wheel was a metal-grinding surface impregnated with crushed diamond powder that permitted a quantum leap in the mass production of automobiles, airplanes and machinery. Steel dies and machine tools had always been used to cut precision parts for industry. As steel blades had to be constantly honed or changed, the production of standardized parts moved at a slow pace. In the early 1930s, the Krupp Company in Germany developed a tungsten carbide alloy that was far more resistant to wear than steel. Before tungsten carbide dies and blades could be adopted by industry, however, some means had to be found for shaping them. Diamonds proved to be the only material hard enough, and the diamond grinding wheel thus became an indispensable tool for mass production.

  Instead of jettisoning the small and poorly crystallized diamonds, called bort, into the sea, De Beers began crushing them into powder and supplying them to the automotive, aircraft and machine tool industry. With Europe rearming for war, millions of tons of this powder could be profitably each year. Oppenheimer immediately saw the potential of "Industrial diamonds."

  Oppenheimer realized that controlling this vital supply of industrial diamonds was necessary to protect the power of his cartel. He was especially concerned about the Forminiere Mines in the Belgian Congo, where black, poorly crystallized diamonds could be mined by the ton rather than the carat. He wrote his son Harry: "There can only be one policy for Dc Beers .... make sure of this Congo production even if the Forminiere diamonds have to be bought in addition [to bort] .... Forminiere will dictate the post-war policies Of the diamond trade. By controlling the Congo production De Beers will maintain its leading position in diamonds." To assure that these crucial mines in the Congo did not slip out of De Beers' control, Sir Ernest negotiated what amounted to a private treaty with the Belgian government. In return for guaranteeing that the Forminiere Mines would sell all its bort to a De Beers subsidiary in London called the Industrial Diamond Corporation, Oppenheimer agreed to provide the Belgian cutting industry with the lion's share of diamonds from all of De Beers' mines. London would have a complete monopoly on the distribution of diamond powder, and Antwerp, which employed some 20,000 cutters, would remain the preeminent center for cutting diamonds. Working through the Belgian banks, Oppenheimer further insured his leverage in the Congo by buying a large block of stock in a Belgian holding company called Sibeka, which owned controlling shares in the mines in the Congo. Pierre Crokaert, a Belgian financier whose family's banking interests were closely allied with those of Oppenheimer's, became a board member of De Beers and a deputy to Oppenheimer. He undertook the responsibility for regulating the production of diamonds from the Congo in accordance the quota set by De Beers. With the completion of this arrangement with the Belgians, De Beers became an international cartel.

  [9]

  Diamonds For Hitler

  The strategic importance of diamonds became acutely clear to both the Allies and Axis powers with the approach of the Second World War in 1939. Only diamonds were hard enough to stamp out the millions of precision parts that were necessary for mass-producing airplane engines, torpedoes, tanks, artillery and the other weapons of war. Only diamonds could be used to draw the fine wire needed for radar and the electronics of war. Only diamonds could provide the jeweled bearings necessary for the stabilizers, gyroscopes and guidance systems for submarines and planes. Only diamonds could provide the abrasives necessary for rapidly converting civilian industries into a war machine. Without a continuing supply of diamonds, the war machine would rapidly slow to a halt. Yet, nearly all the diamond mines remained closed, and De Beers controlled the world supply of diamonds. Obtaining these industrial diamonds thus became a paramount objective for both the United States and Hitler's Germany.

  In Washington, D.C., the administration of President Franklin D. Roosevelt began to hold emergency meetings about diamonds in 1940 when Hitler's armies swept across Europe in a blitzkrieg and threatened to invade England. The possibility had to be at least considered that England, like France, might be overrun or surrender. In that event, the world diamond stockpile would fall into Hitler's hands. Since the United States had less than one year's supply of industrial diamonds, the loss of De Beers' stockpile would make it difficult, if not impossible, to continue the war. The economic planners for the war estimated that the United ,States needed at least 6.5 million carats of industrial diamonds to convert its factories to war production.

  When apprized of this critical shortage in diamonds, President Roosevelt ordered the War Production Board, which had the responsibility for mobilizing the American economy for war, to buy the necessary 6.5 million carats from De Beers. De Beers, however, had other interests to consider. Its entire system for monopolizing diamonds depended on its controlling the available stockpile. Transferring a large portion of the stockpile from London to New York City, where it would be out of its control, ran counter to the De Beers logic.

  Even though the Americans persisted in the negotiations for the diamonds, they found that Sir Ernest Oppenheimer personally opposed any transfer of diamonds to the United States. He argued that if the United States had its own stockpile, and the war suddenly ended, it might release the diamonds and undercut the entire world order that he had so laboriously constructed. Moreover, he held that the United States had sufficient diamonds for present needs, and that De Beers would continue its delivery of diamonds to American manufacturers on a monthly basis. In one letter, he characteriz
ed the American demand for a stockpile as "farcical."

  The Americans were dismayed by this intransigence. In an official Justice Department memorandum, the War Production Board expressed incredulity at the fact that "the leaders of the syndicate are intentionally risking the war production of the allies." President Roosevelt, disturbed by this development, ordered the State Department to intervene directly with Winston Churchill's war cabinet in London.

  The State Department found, however, that the British government was reluctant to press De Beers to part with the diamonds. An investigation by U.S. intelligence indicated that the division of the British government responsible for acting on the request was entirely staffed by former executives of the De Beers "syndicate." In a secret memorandum, the War Production Board noted, "The diamond section of the government and the syndicate seem to be the same."* After the Roosevelt administration had made continuing efforts to persuade the British government that the diamonds were of critical importance to the United States war effort, it ordered the State Department to play its trump card and threaten that the United States would interrupt the supply f airplanes that was vitally needed by the British to defend themselves against the Luftwaffe bombing raids. According to a confidential report in this Justice Department archive, dated April 16, 1942, "It was said unofficially that we would not give planes to England if the syndicate would not sell us the diamonds with which to make them." This dramatic threat had the desired effect. The British government pressed De Beers to accommodate President Roosevelt, and De Beers yielded.

  Oppenheimer agreed to supply the United States immediately with one million carats--14 percent of the American request---and deposit an additional stockpile in Canada for the duration of the war. This Canadian stockpile, which would remain under De Beers control, was meant to mitigate the American concern over the possible capture of the London stockpile.

  The Roosevelt administration was not entirely satisfied with this compromise. It continued to apply pressure to the British government, demanding that De Beers supply the additional 5.5 million carats. By this time, the air of crisis had passed, and De Beers was able to procrastinate successfully. At first, it claimed that it did not have enough diamonds in its vaults to supply this amount. Then, after U.S. intelligence debunked this claim, De Beers advised that its vaults were bombed shut" in an air raid on London. A year passed. Then De Beers asserted that it needed additional time to prepare an inventory of the diamonds it had available.

  By this time, American officials feared that De Beers, despite the pressure exerted on it, had no intention of allowing a diamond stockpile of any magnitude to be established, even in Canada. Moreover, manufacturers of. diamond tools in the United States had begun complaining to the Office of Price Control that De Beers had effectively raised its prices as much as 60 percent through the device of reducing the quality of the diamonds it delivered. So, though the official price per carat remained the same, manufacturers had to buy more of the lower quality diamonds to build the tools and dies for industry. Since it was exceedingly difficult for the price control officials to measure the relative quality of industrial diamonds, De Beers was able to persist in its claim that it had not raised prices. In any case, the Justice Department concluded that the De Beers monopoly, by manipulating supplies from the stockpile, could impede the war effort.

  The Justice Department decided then to launch its own investigation into the diamond monopoly. It had the full cooperation of the War Production Board, which still wanted control of the diamond stockpile, and the OSS, the newly created U.S. wartime intelligence service. The Investigators were not held back by any inhibitions about intercepting mail, borrowing bank records or other such extralegal measures. They all shared a common objective: helping the war effort. In their roughshod manner, they soon began turning up bits of evidence indicating that De Beers had systematically stifled diamond mining in areas of the world over which it could not exert control. For example, intercepted letters from Oppenheimer's associates suggested that litigation had been initiated in Venezuela to prevent Nelson Rockefeller and other Americans from developing diamond mines in that country. One such letter detailed the possibility of competition in Venezuela, and asked an intermediary to suggest to Oppenheimer that he be "ruthless in stamping it out." Another intercepted letter from a Belgian diamond executive suggested that De Beers was intentionally exhausting the diamond mines in the Belgian Congo, while preserving its mines in South Africa, so that after the war was over De Beers "will have complete control over the market.." Justice Department investigators also looked into charges that De Beers had conspired to buy out and shut down potential diamond mining areas in the country of Guyana and the state of Arkansas.

  In Arkansas, it was charged that after diamonds were found there, Oppenheimer bought control of the company that was to mine the diamonds. Then, when the separation plant built on the site failed to produce a sufficient quantity of diamonds per ton of ore to make the mine profitable, it was closed. Subsequently, it was charged that the separation plant had been designed by the engineer in such a manner that it could not possibly retrieve diamonds. It emerged that the engineer was in the employ of De Beers. The mine, which was bought out by associates of Ernest Oppenheimer, was ordered closed in 1921 after Oppenheimer met the mine officials in New York, and the mine's records were ordered destroyed. "An inference could be drawn . . . "the Justice Department memorandum noted, "that the property was sabotaged and then closed at the insistence of Sir Ernest Oppenheimer." The evidence was admittedly highly circumstantial.

  Whatever were the specific tactics of De Beers, the justice Department investigators reached the conclusion that the singular effect of these efforts was to artificially restrain the production of diamonds. This, in turn, produced higher prices. A 1944 memorandum to the attorney general concluded, "The United States is paying monopoly prices for an essential material needed in wartime production." If De Beers were an American company, the memorandum continued, "There would be no question as to [its] having violated the anti-trust laws." Since De Beers was a South African corporation, the Justice Department had to demonstrate that it had some jurisdiction over its activities before it could consider prosecuting it.

  The FBI was called in to interview the leading diamond dealers in New York to determine whether De Beers, which sold them diamonds, could be construed as transacting business in the United States. The FBI reported, "The domestic trade operates in relative secrecy.... The syndicate will sell only to a small group of hand-picked dealers." It further noted that De Beers officials avoided coming to the United States, and all transactions took place in London. Further inquiry showed that De Beers had closed all its bank accounts in the United States at the outset of the investigation.

  The assistant attorney generals at the Justice Department who had superintended the investigation realized that the antitrust division had little chance of ever bringing De Beers to court in the United States. Despite all the prodigious investigative efforts, the case was abandoned in late 1945.

  None of these documents cast any light on the question of how Hitler continued to obtain diamonds for the duration of the war. There was, however, an investigation of this problem by the OSS, the forerunner of the CIA.

  According to a summary of OSS documents, the OSS learned through its agents in Germany that in November of 1943 Hitler had only an eight-month supply of industrial diamonds. When these diamonds ran out, Hitler's war machine would be crippled. It would no longer be possible to build V-2 rockets or other exotic weaponry. It was thus a crucial wartime goal to prevent Hitler from replenishing his supply of diamonds.

  As all mines in South Africa were closed, the OSS reckoned that there was only one place on earth from which the Germans could get industrial diamonds in sufficient quantity to maintain their .military-industrial complex: the Belgian Congo. The Belgian Congo was, however, administered by the Belgian government in exile, which was in London and completely under British control. The mine
s themselves were supervised, and policed, by the De Beers syndicate. In fact, when the justice Department began to move against De Beers, the War Department objected on the grounds that it might undercut the security system that De Beers had developed in the Belgian Congo. In an exchange of secret correspondence between the War and Justice Departments (which was declassified under my Freedom of Information request), it was argued by an official responsible for maintaining the diamond blockade that "almost the entire [diamond] production of Africa is policed through the operation of elaborate controls extending through every mining area of the continent." Further, De Beers, which administered this program, sent "this controlled production ... in a closely guarded stream to London."

  The OSS had determined, however, that tons of diamonds were somehow reaching Nazi Germany. If the De Beers system of "elaborate controls" was as effective as the War Department held, how could such enormous quantities of diamonds be regularly reaching Germany? To answer this question, the OSS had proposed sending its own undercover agents from its field office in Accra to the Belgian Congo. Since the British Ministry of Economic Warfare was responsible for allied activities in the Congo, this OSS action had to be cleared in London. At first the ministry blocked the request, and then it had proposed a joint "diamond investigation." OSS agents met with their British counterparts, but little was done to pinpoint the source of the smuggling. Finally the OSS chief in Accra reported to Washington, D.C.:

  "We have now come to the conclusion (a) that our assistance was requested in this program so that the Diamond Trading Corporation might discover how much we actually knew of the ramifications of the De Beers world monopoly, and (b) that the OSS/Accra recommendations for a Security Committee were sabotaged, not by the British Government, but by the representatives of the Diamond Trading Corporation, Ltd., London, through their domination of the Diamond Committee of the Ministry of Economic Warfare."