Another threat came in 1977. Sir Philip Oppenheimer and other De Beers executives became concerned about the buildup of Israeli stockpiles of uncut diamonds in Tel Aviv. Most of these diamonds had been pledged as collateral for loans with which the dealers bought still more diamonds. The Israeli banks, who had lent nearly one-third of all of Israel's foreign exchange on the diamonds, began asking the dealers to repay the loans. To do this, however, dealers would have to sell their diamonds, which could cause an abrupt drop in the price. And if the price began dropping, the banks themselves might be forced to liquidate the remaining stockpiles of diamonds, causing the sort of panic in the diamond market that could conceivably unsettle the overhang.
After establishing liaisons with the Israeli banks, De Beers executives worked out what one of its chief brokers termed "a billion dollar squeeze play." First, De Beers reduced the number of diamonds provided to the Israeli dealers at the London sights. Then, through a special surcharge, De Beers actually increased the price the dealers had to pay. To get the cash for these diamonds, the latter were forced to reduce their inventories. Meanwhile, De Beers' publicity department churned out a series of press releases about new surcharges and rising prices that distracted attention from the fluctuation in wholesale prices. Before the year ended, according to Jewelers' Circular Keystone, about 350 Israeli dealers, unable to repay their loans, were forced into bankruptcy. The wholesale price, cushioned by De Beers' buying the Israeli operations, wavered but did not collapse. By 1979, stockpile had been successfully dispersed.
The most serious threat to the stability of the diamond overhang came in the 1980s from the sale of "investment" diamonds to speculators in the United States. De Beers had methodically nurtured the idea in America that diamonds were not subject to the vagaries of price that affected other consumer luxuries. To maintain this illusion in the public's mind, De Beers made it a si . ne qua non condition of its marketing strategy that retail prices should never fall. Price competition between major retailers of diamonds was prohibited by the rules of the game prices. Jewelers' Circular Keystone, which interviewed dozens of leading retailers in 1979, explained:
"If the giant retailers ever declared a predatory price war on 'mom and pop' competitors and each other, they could destroy the image of diamonds as a commodity that always appreciates in value. . . . So a tacit unwritten agreement with De Beers forbids such privileged retailers from engaging in predatory price wars." Under this system, nationwide Jewelry chains, though they get their diamonds either directly from De Beers or a De Beers sight-holder at a lower price, do not attempt to undercut the small jewelry shop (which acquires its diamonds on consignments at much higher prices). What varies is the profit and markup, not the retail price. As long as individuals do not attempt to resell their diamonds and thereby discover the enormous difference in markups, or "keystones," as they are called in the trade, it is possible to retain the appearance of stable and gradually increasing prices.
The situation radically changed when the more unsavory sales organizations began selling millions of carats of " investment" diamonds to men who had no sentimental attachment to the diamonds themselves and acquired them solely for the purpose of reselling them at a higher price. They were not even mounted as jewelry. By 1980, it was estimated that American investors had paid more than a billion dollars for these diamonds. Moreover, many of the companies that had sold the diamonds with the guarantee of a "buy-back" at a fixed price had either gone bankrupt or simply closed their offices and disappeared.
The diamond cartel managed had to absorb or get control over these private stockpiles to prevent them from cascading onto the market and unhinge the entire overhang. If they had not, the illusion would shatter. As one dealer explained, "Investment diamonds are bought for $30,000 a carat, not because any women want to wear them on their fingers, but because the investor believes they will be worth $50,000 a carat. He may borrow heavily to finance his investment. When the price begins to decline, everyone will try to sell their diamonds at once. In the end, of course, there will be no buyers for diamonds at $30,000. At this point, there will be a stampede to sell investment diamonds, and the newspapers will begin writing stories about the great diamond crash." When women read about a diamond crash, some might attempt to see their own, but find few buyers. At that point, people will realize that diamonds are not forever.
EPILOGUE: 2011
The End of the Cartel?
For over a century, the De Beers cartel succeeded, despite the great depression, a half dozen recessions, and vast new discovery of diamonds pipes in Australia and Siberia, to prevent the massive overhang in jewel boxes, vaults, and investment funds from flooding onto the diamond market. This incredible achievement in itself made it the most successful cartel in history. It also proved brilliantly adaptable to political change. When civil war and chaos in West and Central Africa opened up diamond fields it had previously controlled through arrangements with politicians and warlords in the 1990s, De Beers brilliantly exploited the outcry against so-called “blood diamonds” to get human-rights organizations, European governments, and the U.N. Security Council to impose a global ban on "undocumented" gem diamonds from "conflict zones" in 2000. Such undocumented diamonds included those diamonds picked out of river beds By Africans and sold into markets outside of the cartel’s purview. The "conflict zones" specified in the UN resolution including the alluvial areas in Congo, Angola and Sierra Leone that De Beers had previously controlled by its network of buying-agents and mercenary gangs. Now, to prevent these diamonds from financing civil strife, the UN had been induced to do the job for De Beers. With De Beers assistance, it established a global certification regime for diamonds that effectively accomplished De Beers’ century-long goal of stifling the flow of gem diamonds to markets it did not control.
In 2005, De Beers also managed to settle the anti-trust that the US government had instituted in 1945 by agreeing to pay $295 million back to diamond purchasers and consenting to abide by an injunction that prohibits it from monopolizing the world supply of rough diamonds. Even if this injunction is difficult, if not impossible, to enforce by a US court, De Beers had also contend with demands from the European Commission, the European Union’s anti-trust arm, that it end it deal to buy diamonds from Russia for its stockpile. This arrangement had been a key element in the cartel structure for nearly half a century. Without it, De Beers could not keep the flood of Russian diamonds off the market and control the price of diamonds. Yet, to abide by the new anti-trust laws of the European Union, De Beers had to terminate it by 2009. The solution De Beers found was to effectively relinquished control over the diamond prices to the Russia’s state-controlled monopoly, Alrosa, which was also the largest the world’s largest diamond producer. Since Russia was not a member of the European Union, it was not bound by its anti-trust rules. In one of the great ironies of History, Vladimir Putin’s Russia now assumed control over what had been a symbol of capitalism, the diamond cartel. The Russian diamond monopoly’s spokesman made it clear Russia meant to limit supply. “If you don’t support the price,” he told the New York Times, “a diamond becomes a mere piece of carbon.” But while the Russians may share the motivation of De Beers, the diamond invention is far more than a crude monopoly for fixing diamond prices; it is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. De Beers managed this feat through its brilliant organizational efforts. For three generations, the Oppenheimer family built a network of relationships with diamond cutters in Antwerp, brokers in Tel Aviv, intermediaries in Africa, and bankers in London based on a mutual trust. This network furnished, among other things, much of the pricing intelligence, discipline and public relations that allowed De Beers to control the diamond trade. If the Russian monopoly lacks the necessary human capital to run this delicate mechanism, the illusion at the heart of the diamond invention , along with the diamond prices it has for so long sustained, may be forever shattered.
The diamond invention is neither eternal nor self-perpetuating. It survived for the past century because two critical conditions were satisfied: the production of diamonds from the world's mines was kept in balance with world consumption; and the public refrained from attempting to sell its inventory back onto the market. But De Beers is in the process of changing its strategy to conform to anti-trust laws. Instead of attempting to control the supply of diamonds, it is aiming to brand the name De Beers and sell diamonds directly into the retail market. If this is the end of the cartel, De Beers previous achievements may prove to be temporary phenomena. The diamond craze of the twentieth century could end as abruptly in the twenty-first century as the tulip mania of the eighteenth century. If that ever happens, the diamond invention will disintegrate and be remembered only as a historical curiosity, as brilliant in its way as the glittering, brittle, little stones it once made so valuable.
END NOTES
PROLOGUE
The idea of a book about the diamond invention began in a casual meeting with Ben Bonas in June of 1978 at a resort in St. Tropez. Bonas was an intermediary between De Beers’ diamond trading company in London and diamond dealers all over the world. Brokers were necessary to maintain the fig leaf that De Beers did not directly deal with US diamond companies, and therefore did not come under the purview of its anti-monopoly laws. Bonas, in this capacity, handled about one-third of the world's uncut diamonds. When I heard that he was in the diamond business my initial response was to assume that it all was part of a very ancient trade. "Not at all," he said. "The diamond business was only really invented in the last hundred years." He pointed out that although the diamonds had been precious gems for centuries, the business of mass-marketing them as engagement rings, and controlling the price, was a comparatively recent phenomenon. The "invention" was the system for restricting the supply of diamonds and maintaining the price in the world market.
It was, in brief, a complete monopoly. The possibility that the value of diamonds was artificially, sustained' by a conspiracy intrigued me, and I decided to look further into this mechanism. My investigation took two and a half years.
The success that the diamond cartel had in creating a market in Japan was explained to me by Hugh Dagnell, one of the chief marketing strategists for the Diamond Trading Company in London. The statistics on the Japanese and other markets come from a private study done by the Diamond Trading Company ,called The Retail Diamond Market for Nine Marketing Countries (1978). 1 also interviewed advertising personnel at N. W. Aver and J. Walter Thompson who were working on a diamond account. The series of full-color advertisements were supplied to me by the Diamond Trading Company in London.
CHAPTER ONE
The Rise and Fall of Diamonds began as a project for the German magazine, Geo, which in 1978 was planning an American edition. The editor, Harold Kaplan, wanted a long report on the mining of diamonds, and he offered to finance a trip to the world's diamond mines. I first went to the offices of the De Beers Diamond Trading Corporation in London at Number 2 Charterhouse Street on November 28, 1978. After receiving an initial briefing on diamond production from Richard Dickson, the public relations officer in charge of visiting journalists, I flew directly to Johannesburg, South Africa. From there I proceeded to diamond mines in Botswana, Lesotho, Namibia and Kimberley. Then I went to the diamond cutting centers in Antwerp and Israel, and back to De Beers' headquarters in London. The trip took eight weeks.
The section on New York was logistically the easiest, since I live in New York and have many friends in the diamond business. The magazine Jewish Living (which lasted only three issues) arranged many of the interviews that I had with Jewish diamond dealers on the New York Exchange. I interviewed the president of the Diamond Dealers Club, William Goldberg, in his office in the Diamond Exchange. Fred Knobloch described his trips to Moscow to buy Soviet diamonds. The articles in the Jewelers' Circular Keystone that detailed the concern for the diamond market were written by David Federman.
In Johannesburg, I spent a good deal of my time at the offices of the Anglo-American Corporation at 44 Main Street. I was especially struck by the genteel and very English atmosphere that prevails here in this part of South Africa. At lunch, for example, the service begins with an English butler serving drinks. Then everyone is ushered to a long table with fine china and crystal glasses. A wine steward pours French claret while a chef, standing at a side board, carves roast beef to each guest's taste. After the meal Cuban cigars are passed around the table. It is much more like dining in a private club in England than at a South African mining company.
Anglo-American executives who explained De Beers' diamond mining strategy included Peter J. R. Leyden, the manager of Diamond Services, L. G. Murray, the chief geologist for De Beers, Barry R. Mortimer, the chief public relations consultant for De Beers, and Ivor Sanders, the public affairs officer at Anglo-American.
The interview cited in the chapter with Harry Oppenheimer took place December 4, 1978, in his office. It lasted for about an hour. I was greatly impressed by the ease with which Oppenheimer could discuss the geopolitics of diamonds.
CHAPTER TWO
One journalistic advantage I had in flying to the diamond mines on De Beers' airplanes was that I had the opportunity to meet en route a number of consulting engineers. Kenneth J. Trueman was, for example, seated next to me on the flight to Botswana, and his insights into the diamond mine there proved very helpful. In all, I flew on a dozen of these mining flights. I was shown around the Orapa mine by Jim Gibson, the chief geologist at the mine.
CHAPTER THREE
The section on the Lesotho mine is based entirely on interviews that I had on December 6, 1978, during my tour of the mine. Keith Whitelock, the general manager of the mine and Rogan MacLean from the Diamond Trading Company in Lesotho helped me understand the problems.
CHAPTER FOUR Because Namibia was in the throes of a political crisis, I arranged to have briefings with the South African General Staff on the guerrilla war with SWAPO in Namibia and with a number of prominent businessmen in Windhoek, the capital of Namibia and Olga Levinson, who writes on politics there. I also read the internal reports of Anglo-American were, which helped illuminate the unique mining operation.
CHAPTER FIVE
In Kimberley I did see the entire history of the diamond cartel laid out before my eyes. There was the original open pit "Big Hole" filled with water. On one side of it, there was the Mining Museum in which De Beers had put together much of the original equipment and buildings used in the mining rush of the nineteenth century. Then there was the De Beers headquarters, which had originally been the headquarters of Barney Barnato, and the De Beers club, where many of the big deals had been struck. "De Beers is Kimberley, Kimberley is De Beers," George Loew, the public relations man for De Beers in Kimberley, observed.
CHAPTER SIX
De Beers generally controls the diamond trade through indirect levers. The most notable exception where a De Beers subsidiary, the Diamond Trading Company, directly exerts pressure on diamond wholesalers and manufacturers is at the London sights. I was in London for two of these occasions: in December of 1978 and September of 1980. Most of the information for this chapter comes from dealers and manufacturers who are regular customers of De Beers. For obvious reasons they requested anonymity.
While the Diamond Trading Company was extremely cooperative in showing me through their headquarters in London and explaining the sorting and distribution procedures, I did not have an opportunity to interview a number of key executives there, including Monty Charles. The policy of De Beers, and the Diamond Trading Company, is to allow journalists access to their public relations department but not to the actual executives outside of that department. The description of Monty Charles comes from interviews with diamond dealers who attended sights regularly and knew him well for a long time. A number of major diamond brokers proved extremely helpful to me in articulating the rules of the game, including Ben Bonas and Richa
rd Hambro and Vivian Prince of I. Hennig.
CHAPTER SEVEN
The section on Cecil Rhodes is drawn from a number of biographies, including J. G. Macdonald, Rhodes: A Life, published by Chatto and Windus London 1940; Andre Maurois, Cecil Rhodes, Collins, London (1953) Much of the detail of Rhodes' competition with the other diamond magnates in South Africa during this period is taken from Brian Roberts, The Diamond Magnates, Charles Scribner's, New York (1972). The quote from Rhodes comes from the book, Old Kimberley, by Anthony Hecking, published by the Kimberley Museum in South Africa. The section on Barney Barnato is drawn from Thurley Jackson, The Great Barnato, published by Heinemann, London (1970), and Brian Roberts, The Diamond Magnates.
CHAPTER EIGHT
The primary source on the life of Sir Ernest Oppenheimer is the book by Theodore Gregory, Ernest Oppenheimer and the Economic Development of Southern Africa, Oxford University Press, Capetown (1962). This biography was commissioned by the Anglo-American Corporation, and the author had access to the letters of Sir Ernest and the records of De Beers and the Anglo-American Corporation The letters quoted from Sir Ernest Oppenheimer in this chapter are taken from this book. Other sources Oppenheimer and Son, McGraw-Hill, New York 0973); Edward Jessup, Ernest Oppenheimer: A Study in Power, Rex Collings, London 0979); and Godeherd Lenzen, The History of Diamond Production and the Diamond Trade, London (1970) The section about the Jews in the diamond trade comes from the Jewish Encyclopedia. The section about Oppenheimer's plan to jettison several tons of diamonds into the North Sea comes from documents I obtained under the Freedom of Information Act, which pertained to the United States government's antitrust suit against De Beers. This historical research was supplemented with interviews with a number of officials at De Beers, including Harry Oppenheimer.
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