De Beers proved to be the most successful cartel arrangement in the annals of modern commerce. While other commodities, such as gold, silver, copper, rubber, and grains, fluctuated wildly in response to economic conditions, diamonds have continued, with few exceptions, to advance upward in price every year since the Depression. Indeed, the cartel seemed so superbly in control of prices — and unassailable — that, in the late 1970s, even speculators began buying diamonds as a guard against the vagaries of inflation and recession.
In September of 1938, Harry Oppenheimer, son of the founder of De Beers and then twenty-nine, traveled from Johannesburg to New York City, to meet with Gerold M. Lauck, the president of N. W. Ayer, a leading advertising agency in the United States. Lauck and N. W. Ayer had been recommended to Oppenheimer by the Morgan Bank, which had helped his father consolidate the De Beers financial empire. His bankers were concerned about the price of diamonds, which had declined worldwide.
In Europe, where diamond prices had collapsed during the Depression, there seemed little possibility of restoring public confidence in diamonds. In Germany, Austria, Italy, and Spain, the notion of giving a diamond ring to commemorate an engagement had never taken hold. In England and France, diamonds were still presumed to be jewels for aristocrats rather than the masses. Furthermore, Europe was on the verge of war, and there seemed little possibility of expanding diamond sales. This left the United States as the only real market for De Beers’s diamonds. In fact, in 1938 some three quarters of all the cartel’s diamonds were sold for engagement rings in the United States. Most of these stones, however, were smaller and of poorer quality than those bought in Europe, and had an average price of $80 apiece. Oppenheimer and the bankers believed that an advertising campaign could persuade Americans to buy more expensive diamonds.
In their subsequent investigation of the American diamond market, the staff of N. W. Ayer found that since the end of World War I, in 1919, the total amount of diamonds sold in America, measured in carats, had declined by 50 percent; at the same time, the quality of the diamonds, measured in dollar value, had declined by nearly 100 percent. An Ayer memo concluded that the depressed state of the market for diamonds was “the result of the economy, changes in social attitudes and the promotion of competitive luxuries.”
Although it could do little about the state of the economy, N. W. Ayer suggested that through a well-orchestrated advertising and public-relations campaign it could have a significant impact on the “social attitudes of the public at large and thereby channel American spending toward larger and more expensive diamonds instead of “competitive luxuries.” Specifically, the Ayer study stressed the need to strengthen the association in the public’s mind of diamonds with romance. Since “young men buy over 90% of all engagement rings” it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.
In addition to putting these plans into action, N. W. Ayer placed a series of lush four-color advertisements in magazines that were presumed to mold elite opinion, featuring reproductions of famous paintings by such artists as Picasso, Derain, Dali, and Dufy. The advertisements were intended to convey the idea that diamonds, like paintings, were unique works of art.
By 1941, The advertising agency reported to its client that it had already achieved impressive results in its campaign. The sale of diamonds had increased by 55 percent in the United States since 1938, reversing the previous downward trend in retail sales. N. W. Ayer noted also that its campaign had required “the conception of a new form of advertising which has been widely imitated ever since. There was no direct sale to be made. There was no brand name to be impressed on the public mind. There was simply an idea — the eternal emotional value surrounding the diamond.” It further claimed that “a new type of art was devised … and a new color, diamond blue, was created and used in these campaigns…. ”
In 1951, N. W. Ayer found some resistance to its million-dollar publicity blitz. It noted in its annual strategy review:
The millions of brides and brides-to-be are subjected to at least two important pressures that work against the diamond engagement ring. Among the more prosperous, there is the sophisticated urge to be different as a means of being smart…. the lower-income groups would like to show more for the money than they can find in the diamond they can afford…
To remedy these problems, the advertising agency argued, “It is essential that these pressures be met by the constant publicity to show that only the diamond is everywhere accepted and recognized as the symbol of betrothal.”
N. W. Ayer was always searching for new ways to influence American public opinion. Not only did it organize a service to “release to the women’s pages the engagement ring” but it set about exploiting the relatively new medium of television by arranging for actresses and other celebrities to wear diamonds when they appeared before the camera. It also established a “Diamond Information Center” that placed a stamp of quasi-authority on the flood of “historical” data and “news” it released. “We work hard to keep ourselves known throughout the publishing world as the source of information on diamonds,” N. W. Ayer commented in a memorandum to De Beers, and added: “Because we have done it successfully, we have opportunities to help with articles originated by others.”
Toward the end of the 1950s, N. W. Ayer reported to De Beers that twenty years of advertisements and publicity had had a pronounced effect on the American psyche. “Since 1939 an entirely new generation of young people has grown to marriageable age,” it said. “To this new generation a diamond ring is considered a necessity to engagements by virtually everyone.” The message had been so successfully impressed on the minds of this generation that those who could not afford to buy a diamond at the time of their marriage would “defer the purchase” rather than forgo it.
The campaign to internationalize the diamond invention began in earnest in the mid-1960s. The prime targets were Japan, Germany, and Brazil. Since N. W. Ayer was primarily an American advertising agency, De Beers brought in the J. Walter Thompson agency, which had especially strong advertising subsidiaries in the target countries, to place most of its international advertising. Within ten years, De Beers succeeded beyond even its most optimistic expectations, creating a billion-dollar-a-year diamond market in Japan, where matrimonial custom had survived feudal revolutions, world wars, industrialization, and even the American occupation.
J. Walter Thompson began its campaign by suggesting that diamonds were a visible sign of modern Western values. It created a series of color advertisements in Japanese magazines showing beautiful women displaying their diamond rings. All the women had Western facial features and wore European clothes. Moreover, the women in most of the advertisements were involved in some activity — such as bicycling, camping, yachting, ocean swimming, or mountain climbing — that defied Japanese traditions. In the background, there usually stood a Japanese man, also attired in fashionable European clothes. In addition, almost all of the automobiles, sporting equipment, and other artifacts in the picture were conspicuous foreign imports. The message was clear: diamonds represent a sharp break with the Oriental past and a sign of entry into modern life.
In America, which remained the most important market for most of De Beer’s diamonds, N. W. Ayer recognized the need to create a new demand for diamonds among long-married couples. “Candies come, flowers come, furs come,” but such ephemeral gifts fail to satisfy a woman’s psychological craving for “a renewal of the romance,” N. W. Ayer said in a report. An advertising campaign could instill the idea that the gift of a second diamond, in the later years of marriage, would be accepted as a sign of “ever-growing love.” In 1962, N. W. Ayer asked for authorization to “begin the long-term process of setting the diamond aside as the only appropriate gift for those later-in-life occasions where sentiment is to be expressed.” De Beers immediately approved the campaign.
The diamond market had to be further restructured in the mid-1960s to accomodate a surfeit of minute diamonds, which De Beers undertook to market for the Soviets. They had discovered diamond mines in Siberia, after intensive exploration, in the late 1950s: De Beers and its allies no longer controlled the diamond supply, and realized that open competition with the Soviets would inevitably lead, as Harry Oppenheimer gingerly put it, to “price fluctuations,”which would weaken the carefully cultivated confidence of the public in the value of diamonds. Oppenheimer, assuming that neither party could afford risking the destruction of the diamond invention, offered the Soviets a straightforward deal—”a single channel” for controlling the world supply of diamonds. In accepting this arrangement, the Soviets became partners in the cartel, and co-protectors of the diamond invention.
DeBeers devised the “eternity ring,” made up of as many as twenty-five tiny Soviet diamonds, which could be sold to an entirely new market of older married women. The advertising campaign was based on the theme of recaptured love. Again, sentiments were born out of necessity: older American women received a ring of miniature diamonds because of the needs of a South African corporation to accommodate the Soviet Union.
The shortage of small diamonds proved temporary. As Soviet diamonds continued to flow into London at an ever-increasing rate, De Beers’s strategists came to the conclusion that this production could not be entirely absorbed by “eternity rings” or other new concepts in jewelry, and began looking for markets for miniature diamonds outside the United States. Even though De Beers had met with enormous success in creating an instant diamond “tradition” in Japan, it was unable to create a similar tradition in Brazil, Germany, Austria, or Italy. By paying the high cost involved in absorbing this flood of Soviet diamonds each year, De Beers prevented — at least temporarily — the Soviet Union from taking any precipitous actions that might cause diamonds to start glutting the market. N. W. Ayer argued that “small stone jewelry advertising” could not be totally abandoned: “Serious trade relationship problems would ensue if, after fifteen years of stressing ‘affordable’ small stone jewelry, we were to drop all of these programs.”
N. W. Ayer learned from an opinion poll it commissioned from the firm of Daniel Yankelovich, Inc. that the gift of a diamond contained an important element of surprise. “Approximately half of all diamond jewelry that the men have given and the women have received were given with zero participation or knowledge on the part of the woman recipient,” the study pointed out. N. W Ayer analyzed this “surprise factor”:
Women are in unanimous agreement that they want to be surprised with gifts…. They want, of course, to be surprised for the thrill of it. However, a deeper, more important reason lies behind this desire…. “freedom from guilt.” Some of the women pointed out that if their husbands enlisted their help in purchasing a gift (like diamond jewelry), their practical nature would come to the fore and they would be compelled to object to the purchase.
Women were not totally surprised by diamond gifts: some 84 percent of the men in the study “knew somehow” that the women wanted diamond jewelry. The study suggested a two-step “gift-process continuum”: first, “the man ‘learns’ diamonds are o.k.” fom the woman; then, “at some later point in time, he makes the diamond purchase decision” to surprise the woman.
For advertising diamonds in the late 1970s, the implications of this research were clear. To induce men to buy diamonds for women, advertising should focus on the emotional impact of the “surprise” gift transaction. In the final analysis, a man was moved to part with earnings not by the value, aesthetics, or tradition of diamonds but by the expectation that a “gift of love” would enhance his standing in the eyes of a woman. On the other hand, a woman accepted the gift as a tangible symbol of her status and achievements.
Except for those few stones that have been destroyed, every diamond that has been found and cut into a jewel still exists today and is literally in the public’s hands. Some hundred million women wear diamonds, while millions of others keep them in safe-deposit boxes or strongboxes as family heirlooms. It is conservatively estimated that the public holds more than 500 million carats of gem diamonds, which is more than fifty times the number of gem diamonds produced by the diamond cartel in any given year. Since the quantity of diamonds needed for engagement rings and other jewelry each year is satisfied by the production from the world’s mines, this half-billion-carat supply of diamonds must be prevented from ever being put on the market. The moment a significant portion of the public begins selling diamonds from this inventory, the price of diamonds cannot be sustained. For the diamond invention to survive, the public must be inhibited from ever parting with its diamonds.
In developing a strategy for De Beers in 1953, N. W. Ayer said: “In our opinion old diamonds are in ‘safe hands’ only when widely dispersed and held by individuals as cherished possessions valued far above their market price.” As far as De Beers and N. W. Ayer were concerned, “safe hands” belonged to those women psychologically conditioned never to sell their diamonds. This conditioning could not be attained solely by placing advertisements in magazines. The diamond-holding public, which includes people who inherit diamonds, had to remain convinced that diamonds retained their monetary value. If it saw price fluctuations in the diamond market and attempted to dispose of diamonds to take advantage of changing prices, the retail market would become chaotic. It was therefore essential that De Beers maintain at least the illusion of price stability.
Selling individual diamonds at a profit, even those held over long periods of time, can be surprisingly difficult. For example, in 1970, the London-based consumer magazine Money Which?decided to test diamonds as a decade long investment. It bought two gem-quality diamonds, weighing approximately one-half carat apiece, from one of London’s most reputable diamond dealers, for £400 (then worth about a thousand dollars). For nearly nine years, it kept these two diamonds sealed in an envelope in its vault. During this same period, Great Britain experienced inflation that ran as high as 25 percent a year. For the diamonds to have kept pace with inflation, they would have had to increase in value at least 300 percent, making them worth some £400 pounds by 1978. But when the magazine’s editor, Dave Watts,tried to sell the diamonds in 1978, he found that neither jewelry stores nor wholesale dealers in London’s Hatton Garden district would pay anywhere near that price for the diamonds. Most of the stores refused to pay any cash for them; the highest bid Watts received was £500, which amounted to a profit of only £100 in over eight years, or less than 3 percent at a compound rate of interest. If the bid were calculated in 1970 pounds, it would amount to only £167. Dave Watts summed up the magazine’s experiment by saying, “As an 8-year investment the diamonds that we bought have proved to be very poor.” The problem was that the buyer, not the seller, determined the price.
In 1976, the Dutch Consumer Association also tried to test the price appreciation of diamonds by buying a perfect diamond of over one carat in Amsterdam, holding it for eight months, and then offering it for sale to the twenty leading dealers in Amsterdam. Nineteen refused to buy it, and the twentieth dealer offered only a fraction of the purchase price.
Selling diamonds can also be an extraordinarily frustrating experience for private individuals. In 1978, for example, a wealthy woman in New York City decided to sell back a diamond ring she had bought from Tiffany two years earlier for $100,000 and use the proceeds toward a necklace of matched pearls that she fancied. She had read about the “diamond boom” in news magazines and hoped that she might make a profit on the diamond. Instead, the sales executive explained, with what she said seemed to be a touch of embarrassment, that Tiffany had “a strict policy against repurchasing diamonds.” He assured her, however, that the diamond was extremely valuable, and suggested another Fifth Avenue jewelry store. The woman went from one leading jeweler to another, attempting to sell her diamond. One store offered to swap it for another jewel, and two other jewelers offered to accept the diamond “on consignment” and pay her a percentage of what they sold it for, but none of the half-dozen jewelers she visited offered her cash for her $100,000 diamond. She finally gave up and kept the diamond.
The firm perhaps most frequently recommended by New York jewelry shops is Empire Diamonds Corporation, which is situated on the sixty-sixth floor of the Empire State Building, in midtown Manhattan. Empire’s reception room, which resembles a doctor’s office, is usually crowded with elderly women who sit nervously in plastic chairs waiting for their names to be called. One by one, they are ushered into a small examining room, where an appraiser scrutinizes their diamonds and makes them a cash offer. “We usually can’t pay more than a maximum of 90 percent of the current wholesale price,” says Jack Brod, president of Empire Diamonds. “In most cases we have to pay less, since the setting has to be discarded, and we have to leave a margin for error in our evaluation—especially if the diamond is mounted in a setting.” Empire removes the diamonds from their settings, which are sold as scrap, and resells them to wholesalers. Because of the steep markup on diamonds, individuals who buy retail and in effect sell wholesale often suffer enormous losses. For example, Brod estimates that a half-carat diamond ring, which might cost $2,000 at a retail jewelry store, could be sold for only $600 at Empire.
Many of the elderly women who bring their jewelry to Empire Diamonds and other buying services have been victims of burglaries or muggings and fear further attempts. Thieves, however, have an even more difficult time selling diamonds than their victims. When suspicious-looking characters turn up at Empire Diamonds, they are asked to wait in the reception room, and the police are called in. In January of 1980, for example, a disheveled youth came into Empire with a bag full of jewelry that he called “family heirlooms.” When Brod pointed out that a few pieces were imitations, the youth casually tossed them into the wastepaper basket. Brod buzzed for the police.
When thieves bring diamonds to underworld “fences,” they usually get only a pittance for them. In 1979, for example, New York City police recover stolen diamonds with an insured value of $50,000 which had been sold to a ‘fence’ for only $200. According to the assistant district attorney who handled the case, the fence was unable to dispose of the diamonds on 47th Street, and he was eventually turned in by one of the diamond dealers he contacted.
A serious threat to the stability of the diamond invention came in the late 1970s from the sale of “investment” diamonds to speculators in the United States. A large number of fraudulent investment firms, most of them in Arizona, began telephoning prospective clients drawn from various lists of professionals and investors who had recently sold stock. “Boiler-room operators,” many of them former radio and television announcers, persuaded strangers to buy mail-order diamonds as investments that were supposedly much safer than stocks or bonds. Many of the newly created firms also held “diamond-investment seminars” in expensive resort hotels, where they presented impressive graphs and data. Typically assisted by a few well-rehearsed shills in the audience, the seminar leaders sold sealed packets of diamonds to the audience. The leaders often played on the fear of elderly investors that their relatives might try to seize their cash assets and commit them to nursing homes. They suggested that the investors could stymie such attempts by putting their money into diamonds and hiding them.
Some of the entrepreneurs were relative newcomers to the diamond business. Rayburne Martin, who went from De Beers Diamond Investments, Ltd. (no relation to the De Beers cartel) to Tel-Aviv Diamond Investments, Ltd.—both in Scottsdale, Arizona—had a record of embezzlement and securities law violations in Arkansas, and was a fugitive from justice during most of his tenure in the diamond trade. Harold S. McClintock, also known as Harold Sager, had been convicted of stock fraud in Chicago and involved in a silver-bullion-selling caper in 1974 before he helped organize DeBeers Diamond Investments, Ltd. Don Jay Shure, who arranged to set up another DeBeers Diamond Investments, Ltd., in Irvine, California, had also formerly been convicted of fraud. Bernhard Dohrmann, the “marketing director” of the International Diamond Corporation, had served time in jail for security fraud in 1976. Donald Nixon, the nephew of former President Richard M. Nixon, and fugitive financier Robert L. Vesco were, according to the New York State attorney general, participating in the late 1970s in a high-pressure telephone campaign to sell “overvalued or worthless diamonds” by employing “a battery of silken-voiced radio and television announcers.” Among the diamond salesmen were also a wide array of former commodity and stock brokers who specialized in attempting to sell sealed diamonds to pension funds and retirement plans.
In London, the real De Beers, unable to stifle all the bogus entrepreneurs using its name, decided to explore the potential market for investment gems. It announced in March of 1978 a highly unusual sort of “diamond fellowship” for selected retail jewelers. Each jeweler who participated would pay a $2,000 fellowship fee. In return, he would receive a set of certificates for investment-grade diamonds, contractual forms for “buy-back” guarantees, promotional material, and training in how to sell these unmounted diamonds to an entirely new category of customers. The selected retailers would then sell loose stones rather than fine jewels, with certificates guaranteeing their value at $4,000 to $6,000.
De Beers’s modest move into the investment-diamond business caused a tremor of concern in the trade. De Beers had always strongly opposed retailers selling “investment” diamonds, on the grounds that because customers had no sentimental attachment to such diamonds, they would eventually attempt to resell them and cause sharp price fluctuations.
If De Beers had changed its policy toward investment diamonds, it was not because it wanted to encourage the speculative fever that was sweeping America and Europe. De Beers had “little choice but to get involved,” as one De Beers executive explained. Many established diamond dealers had rushed into the investment field to sell diamonds to financial institutions, pension plans, and private investors. It soon became apparent in the Diamond Exchange in New York that selling unmounted diamonds to investors was far more profitable than selling them to jewelry shops. By early 1980, David Birnbaum, a leading dealer in New York, estimated that nearly a third of all diamond sales in the United States were, in terms of dollar value, of these unmounted investment diamonds. “Only five years earlier, investment diamonds were only an insignificant part of the business,” he said. Even if De Beers did not approve of this new market in diamonds, it could hardly ignore a third of the American diamond trade.
To make a profit, investors must at some time find buyers who are willing to pay more for their diamonds than they did. Here, however, investors face the same problem as those attempting to sell their jewelry: there is no unified market in which to sell diamonds. Although dealers will quote the prices at which they are willing to sell investment-grade diamonds, they seldom give a set price at which they are willing to buy diamonds of the same grade. In 1977, for example, Jewelers’ Circular Keystone polled a large number of retail dealers and found a difference of over 100 percent in offers for the same quality of investment-grade diamonds. Moreover, even though most investors buy their diamonds at or near retail price, they are forced to sell at wholesale prices. As Forbes magazine pointed out, in 1977, “Average investors, unfortunately, have little access to the wholesale market. Ask a jeweler to buy back a stone, and he’ll often begin by quoting a price 30% or more below wholesale.” Since the difference between wholesale and retail is usually at least 100 percent in investment diamonds, any gain from the appreciation of the diamonds will probably be lost in selling them.
“There’s going to come a day when all those doctors, lawyers, and other fools who bought diamonds over the phone take them out of their strongboxes, or wherever, and try to sell them,” one dealer predicted last year. Another gave a gloomy picture of what would happen if this accumulation of diamonds were suddenly sold by speculators. “Investment diamonds are bought for $30,000 a carat, not because any woman wants to wear them on her finger but because the investor believes they will be worth $50,000 a carat. He may borrow heavily to leverage 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 a carat or even $15,000. At this point, there will be a stampede to sell investment diamonds, and the newspapers will begin writing stories about the great diamond crash. Investment diamonds constitute, of course, only a small fraction of the diamonds held by the public, but when women begin reading about a diamond crash, they will take their diamonds to retail jewelers to be appraised and find out that they are worth less than they paid for them. At that point, people will realize that diamonds are not forever, and jewelers will be flooded with customers trying to sell, not buy, diamonds. That will be the end of the diamond business.”
But a panic on the part of investors is not the only event that could end the diamond business. De Beers is at this writing losing control of several sources of diamonds that might flood the market at any time, deflating forever the price of diamonds.
In the winter of 1978, diamond dealers in New York City were becoming increasingly concerned about the possibility of a serious rupture, or even collapse, of the “pipeline” through which De Beers’s diamonds flow from the cutting centers in Europe to the main retail markets in America and Japan. This pipeline, a crucial component of the diamond invention, is made up of a network of brokers, diamond cutters, bankers, distributors, jewelry manufacturers, wholesalers, and diamond buyers for retail establishments. Most of the people in this pipeline are Jewish, and virtually all are closely interconnected, through family ties or long-standing business relationships.
An important part of the pipeline goes from London to diamond-cutting factories in Tel Aviv to New York; but in Israel, diamond dealers were stockpiling supplies of diamonds rather than processing and passing them through the pipeline to New York. Since the early 1970s, when diamond prices were rapidly increasing and Israeli currency was depreciating by more than 50 percent a year, it had been more profitable for Israeli dealers to keep the diamonds they received from London than to cut and sell them. As more and more diamonds were taken out of circulation in Tel Aviv, an acute shortage began in New York, driving prices up.
In early 1977, Sir Philip Oppenheimer dispatched his son Anthony to Tel Aviv, accompanied by other De Beers executives, to announce that De Beers intended to cut the Israeli quota of diamonds by at least 20 percent during the coming year. This warning had the opposite effect of what he intended. Rather than paring down production to conform to this quota, Israeli manufacturers and dealers began building up their own stockpiles of diamonds, paying a premium of 100 percent or more for the unopened boxes of diamonds that De Beers shipped to Belgian and American dealers. (By selling their diamonds to the Israelis, the De Beers clients could instantly double their money without taking any risks.) Israeli buyers also moved into Africa and began buying directly from smugglers. The Intercontinental Hotel in Liberia, then the center for the sale of smuggled goods, became a sort of extension of the Israeli bourse. After the Israeli dealers purchased the diamonds, either from De Beers clients or from smugglers, they received 80 percent of the amount they had paid in the form of a loan from Israeli banks. Because of government pressure to help the diamond industry, the banks charged only 6 percent interest on these loans, well below the rate of inflation in Israel. By 1978, the banks had extended $850 million in credit to diamond dealers, an amount equal to some 5 percent of the entire gross national product of Israel. The only collateral the banks had for these loans was uncut diamonds.
De Beers estimated that the Israeli stockpile was more than 6 million carats in 1977, and growing at a rate of almost half a million carats a month. At that rate, it would be only a matter of months before the Israeli stockpile would exceed the cartel’s in London. If Israel controlled such an enormous quantity of diamonds, the cartel could no longer fix the price of diamonds with impunity. At any time, the Israelis could be forced to pour these diamonds onto the world market. The cartel decided that it had no alternative but to force liquidation of the Israeli stockpile.
If De Beers wanted to bring the diamond speculation under control, it would have to clamp down on the banks, which were financing diamond purchases with artificially low interest rates. De Beers announced that it was adopting a new strategy of imposing “surcharges” on diamonds. Since these “surcharges,” which might be as much as 40 percent of the value of the diamonds, were effectively a temporary price increase, they could pose a risk to banks extending credit to diamond dealers. For example, with a 40 percent surcharge, a diamond dealer would have to pay $1,400 rather than $1,000 for a small lot of diamonds; however, if the surcharge was withdrawn, the diamonds would be worth only a thousand dollars. The Israeli banks could not afford to advance 80 percent of a purchase price that included the so-called surcharge; they therefore required additional collateral from dealers and speculators. Further, they began, under pressure from De Beers, to raise interest rates on outstanding loans.
Within a matter of weeks in the summer of 1978, interest rates on loans to purchase diamonds went up 50 percent. Moreover, instead of lending money based on what Israeli dealers paid for diamonds, the banks began basing their loans on the official De Beers price for diamonds. If a dealer paid more than the De Beers price for diamonds—and most Israeli dealers were paying at least double the price—he would have to finance the increment with his own funds.
To tighten the squeeze on Israel, De Beers abruptly cut off shipments of diamonds to forty of its clients who had been selling large portions of their consignments to Israeli dealers. As Israeli dealers found it increasingly difficult either to buy or finance diamonds, they were forced to sell diamonds from the stockpiles they had accumulated. Israeli diamonds poured onto the market, and prices at the wholesale level began to fall. This decline led the Israeli banks to put further pressure on dealers to liquidate their stocks to repay their loans. Hundreds of Israeli dealers, unable to meet their commitments, went bankrupt as prices continued to plunge. The banks inherited the diamonds.
Last spring, executives of the Diamond Trading Company made an emergency trip to Tel Aviv. They had been informed that three Israeli banks were holding $1.5 billion worth of diamonds in their vaults—an amount equal to nearly the annual production of all the diamond mines in the world—and were threatening to dump the hoard of diamonds onto an already depressed market. When the banks had investigated the possibilities of reselling the diamonds in Europe or the United States, they found little interest. The world diamond market was already choked with uncut and unsold diamonds. The only alternative to dumping their diamonds on the market was reselling them to De Beers itself.
De Beers, however, is in no position to absorb such a huge cache of diamonds. During the recession of the mid-970s, it had to use a large portion of its cash reserve to buy diamonds from Russia and from newly independent countries in Africa, in order to preserve the cartel arrangement. As it added diamonds to its stockpile, De Beers depleted its cash reserves. Furthermore, in 1980, De Beers found it necessary to buy back diamonds on the wholesale markets in Antwerp to prevent a complete collapse in diamond prices. When the Israeli banks approached De Beers about the possibility of buying back the diamonds, De Beers, possibly for the first time since the depression of the 1930s, found itself severely strapped for cash. It could, of course, borrow the $1.5 billion necessary to bail out the Israeli banks, but this would strain the financial structure of the entire Oppenheimer empire.
Sir Philip Oppenheimer, Monty Charles, Michael Grantham, and other top executives from De Beers and its subsidiaries attempted to prevent the Israeli banks from dumping their hoard of diamonds. Despite their best efforts, however, the situation worsened. Last September, Israel’s major banks quietly informed the Israeli government that they faced losses of disastrous proportions from defaulted accounts almost entirely collateralized with diamonds. Three of Israel’s largest banks—the Union Bank of Israel, the Israel Discount Bank, and Barclays Discount Bank—had loans of some $660 million outstanding to diamond dealers, which constituted a significant portion of the bank debt in Israel. To be sure, not all of these loans were in jeopardy; but, according to bank estimates, defaults in diamond accounts rose to 20 percent of their loan portfolios. The crisis had to be resolved either by selling the diamonds that had been put up as collateral, which might precipitate a worldwide selling panic, or by some sort of outside assistance from the Israeli government or De Beers or both. The negotiations provided only stopgap assistance: De Beers would buy back a small proportion of the diamonds, and the Israeli government would not force the banks to conform to banking regulations that would result in the liquidation of the stockpile.
“Nobody took into account that diamonds, like any other commodity, can drop in value,” Mark Mosevics, chairman of First International Bank of Israel, explained to The New York Times.According to industry estimates, the average one-carat flawless diamond had fallen in value by 50 percent since January of 1980. In March of 1980, for example, the benchmark value for such a diamond was $63,000; in September of 1981, it was only $23,000. This collapse of prices forced Israeli banks to sell diamonds from their stockpile at enormous discounts. One Israeli bank reportedly liquidated diamonds valued at $6 million for $4 million in cash in late 1981. It became clear to the diamond trade that a major stockpile of large diamonds was out of De Beers’s control.
The most serious threat to De Beers is yet another source of diamonds that it does not control—a source so far untapped. Since Cecil Rhodes and the group of European bankers assembled the components of the diamond invention at the end of the nineteenth century, managers of the diamond cartel have shared a common nightmare—that a giant new source of diamonds would be discovered outside their purview. Sir Ernest Oppenheimer, using all the colonial connections of the British Empire, succeeded in weaving the later discoveries of diamonds in Africa into the fabric of the cartel; Harry Oppenheimer managed to negotiate a secret agreement that effectively brought the Soviet Union into the cartel. However, these brilliant efforts did not end the nightmare. In the late 1970s, vast deposits of diamonds were discovered in the Argyle region of Western Australia, near the town of Kimberley (coincidentally named after Kimberley, South Africa). Test drillings last year indicated that these pipe mines could produce up to 50 million carats of diamonds a year—more than the entire production of the De Beers cartel in 1981. Although only a small percentage of these diamonds are of gem quality, the total number produced would still be sufficient to change the world geography of diamonds. Either this 50 million carats would be brought under control or the diamond invention would be destroyed.
De Beers rapidly moved to get a stranglehold on the Australian diamonds. It began by acquiring a small, indirect interest in Conzinc Riotinto of Australia, Ltd. (CRA), the company that controlled most of the mining rights. In 1980, it offered a secret deal to CRA through which it would market the total output of Australian production. This agreement might have ended the Australian threat if Northern Mining Corporation, a minority partner in the venture, had accepted the deal. Instead, Northern Mining leaked the terms of the deal to a leading Australian newspaper, which reported that De Beers planned to pay the Australian consortium 80 percent less than the existing market price for the diamonds. This led to a furor in Australia. The opposition Labour Party charged not only that De Beers was seeking to cheat Australians out of the true value of the diamonds but that the deal with De Beers would support the policy of apartheid in South Africa. It demanded that the government impose export controls on the diamonds rather than allow them to be controlled by a South African corporation. Prime Minister Malcolm Fraser, faced with a storm of public protest, said that he saw no advantage in “arrangements in which Australian diamond discoveries only serve to strengthen a South African monopoly.” He left the final decision on marketing, however, to the Western Australia state government and the mining companies, which may or may not decide to make an arrangement with De Beers.
De Beers also faces a crumbling empire in Zaire. Sir Ernest Oppenheimer had concluded, more than fifty years ago, that control over the diamond mines in Zaire (then called the Belgian Congo) was the key to the cartel’s control of world production. De Beers, together with its Belgian partners, had instituted mining and sorting procedures that would maximize the production of industrial (rather than gem) diamonds. Since there was no other ready customer for the enormous quantities of industrial diamonds the Zairian mines produced, De Beers remained their only outlet. In June of last year, however, President Mobuto abruptly announced that his country’s exclusive contract with a De Beers subsidiary would not be renewed. Mobuto was reportedly influenced by offers he received for Zaire’s diamond production from both Indian and American manufacturers. According to one New York diamond dealer, “Mobuto simply wants a more lucrative deal.” Whatever his motives, the sudden withdrawal of Zaire from the cartel further undercuts the stability of the diamond market. With increasing pressure for the independence of Namibia, and a less friendly government in neighboring Botswana, De Beers’s days of control in black Africa seem numbered.
Even in the midst of this crisis, De Beers’s executives in London have been maneuvering to save the diamond invention by buying up loose diamonds. The inventory of diamonds in De Beers’s vault has swollen to a value of over a billion dollars—twice the value of the 1979 inventory. To rekindle the demand for diamonds, De Beers recently launched a new multimillion-dollar advertising campaign (including $400,000 for television advertisements during the British royal wedding in July), yet it can be expected to buy only a few years of time for the cartel. By the mid-1980s, the avalanche of Australian diamonds will be pouring onto the market. Unless the resourceful managers of De Beers can find a way to gain control of the various sources of diamonds that will soon crowd the market, these sources may bring about the final collapse of world diamond prices. If they do, the diamond invention will disintegrate and be remembered only as a historical curiosity, as brilliant in its way as the glittering little stones it once made so valuable.