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The DeBeers Conspiracy
As I mentioned in the Diamond funfact, I don't like
diamonds. As I also mentioned, this is due entirely to the DeBeers diamond
cartel and has nothing to do with diamonds, the mineral. Some of you,
fully cognizant of the nefarious deeds of Cecil Rhodes and his successors, undoubtedly
nodded your heads in agreement with my distaste. But others, not aware
of the history of the world's most successful cartel, may have felt that the
DeBeers statement was a little cryptic even by my own inscrutable standards.
So for you, the innocent consumers of the world, I give you the story of diamonds,
the business.
Until the discovery of the first large diamond
mine in South Africa in 1870, diamonds were far from being a girl's best friend.
Through the 17th century, the only known source of diamonds in the world were
a few riverbeds and a couple of mines in India. Diamonds were discovered
in Brazil around 1740, but even when these mines came on line, the world output
of diamonds was apparently only a couple of hundred thousand carats per year.
When large deposits of diamonds were found in South Africa, the first miners
truly thought they had struck it rich. Here was an astonishingly rare
stone which, for them, wasn't so rare. As the miners began to count up
their riches based on the pre-find price of diamonds, it seemed they would all
be rich beyond their wildest dreams. But, unfortunately, something happened.
The diamond market, which had formerly been so small as to almost ignore the
normal process of supply and demand, began to heed economic laws. The
price of diamonds began to fluctuate, and not always upward. The trouble
was that the miners couldn't help themselves. If a miner feared that a
competitor had a stash of a certain style of stone to sell, then it behooved
him to sell his first, before the price dropped. Cecil Rhodes, owner of
several mining claims, realized that this was no way to run an industry.
He began to buy up the claims of other miners. He was helped mightily
in his task by an epidemic that forced many of the miners to flee Kimberley
and sell their claims for a song. Eventually, by purchasing the holdings
of the other entrepreneur who was trying the same thing, Rhodes was able to
achieve a stranglehold on the diamond supply.
This smoothed out pricing fluctuations nicely.
Rhodes' company, DeBeers Mining Consolidated Mines, controlled 90% of the world's
supply of diamonds. By ensuring that a steady flow of diamonds came to
the market, it kept the price rock steady. But unfortunately, this was
not enough. When the depression hit in the 1930's, DeBeers knew it was
in trouble. European purchases of diamonds had collapsed along with the
fortunes of wealthy Europeans. In the US, diamond purchases had also fallen
precipitously since World War I. But there was still hope. In the
US, DeBeers had succeeded in fostering the custom of the diamond engagement
ring. Trouble was, Americans didn't really seem to care what size or quality
of stone they bought. DeBeers hired the advertising firm N. W. Ayer to
put together a campaign to change all that. Ayer succeeded brilliantly.
Their first goal was to cement a connection between diamonds and romance.
This was done both with traditional advertising and the creation of stories
sent to magazines and newspapers discussing the size and beauty of diamonds
that the rich and famous gave to their wives. The British royal family
was convinced to wear diamonds in preference to other jewels when in public.
And lecturers were sent to high schools around the country to talk to young
girls about diamond engagement rings.
The goal of all of this was simple. The public
had to be convinced to buy the increasing number of diamonds being produced
in the world's mines. And just as importantly, they had to be stopped
from ever attempting to sell the stones. The number of diamonds in circulation
in the world was growing rapidly and was by then far in excess of the new supply
mined each year. If owners were to sell the stones with any regularity,
they would, as time went on, decimate the value of new output. Therefore,
Ayer placed paramount in all of its campaigns the romantic-- as opposed to economic--
value of diamonds. As perhaps their master stroke, they created the slogan
'A diamond is forever', embedding the connotation that not only was a diamond
was the perfect symbol of your eternal love, but also that it would be a repudiation
of that love to ever part with the stone.
But there was another important aspect to this strategy,
which Ayer could not help with. This was to preserve the image of diamonds
as a lasting store of value. Two tactics were used. The first was
to regulate the supply of diamonds so that the price never appeared to decline.
This meant withholding stones of a given size or quality from the market when
demand was soft, and-- just as importantly-- supplying the needed extra stones
when demand was strong. If this was not done, there would be no way to
stop the price from falling when demand dropped. Also, a quick upward
spike in prices might convince some owners to sell their stones and take advantage
of a quick profit.
The second tactic had to attempted more subtly.
DeBeers needed to create the illusion that diamonds were excellent stores of
value while simultaneously stopping holders from taking advantage of that value.
They did this with the willing complicity of the jewelry retailers. It
is surprisingly difficult to sell a diamond. Such famous jewelers as Tiffany
have strict policies against repurchasing diamonds, and most other retailers
either implicitly or explicitly have the same policy. There is, in fact,
little incentive for the retailers to buy the diamonds. The mark-up from
the tightly controlled wholesale market to retail is generally in excess of
100%, so even if the retailer were willing to buy a diamond, it would be for
far less than the original purchase price. And retailers usually buy their
diamonds on consignment from the wholesalers, only paying them when the stones
sell. Since DeBeers stands behind the wholesalers with a large inventory
of diamonds, a retailer wanting more diamonds can easily get them, so why offend
a customer with an offer of perhaps 1/3rd the retail price of the stone?
A truly determined seller can sell a diamond to a firm specializing in such
purchases, but the price paid is still well below wholesale, and the process
is not all that easy.
DeBeers final challenge was dealing with the ever growing
supply of newly-mined diamonds. Russia began large-scale mining of diamonds
in the 1960's, providing the first real threat to DeBeers. DeBeers convinced
the Russians to sell through the DeBeers cartel. DeBeers then had to create
a demand for the high-quality, but generally small, Russian product. And
lo, there was born the diamond eternity ring! Actually, Ayer (they still
had the account) was so successful in encouraging the purchase of smaller diamonds
that larger diamonds began to languish unsold. And so, another campaign
was begun to convince women (and men, since men are the major purchasers of
diamonds even though they almost never wear them) that while a diamond band
was fine for an anniversary, the engagement ring should be a solitaire.
Actually the 'two month's salary' guideline serves more than
one purpose here. Not only does it encourage men to spend an astonishing
percentage of their salary on a small piece of carbon, but it emphasizes the
economic statement that the diamond makes about the man giving it. If
it actually were the case that all men paid a similar portion of their salary
for a ring, then clearly a man giving a larger diamond was that much more successful.
And the man could give it without appearing to be self-centered or a show-off
because not only was the diamond for his fiancee rather than himself, but it
was also a statement of his love in a way that other expensive gifts-- even
of other precious stones-- are not.
The DeBeers diamond monopoly is, in fact, far and away
the most successful cartel in the modern world. DeBeers has shown its
willingness to attack those who dare to defy it by flooding the market with
whatever type of stone they were attempting to sell outside of the DeBeers channel,
as they did to Zaire in 1981, or choke off supply entirely, as they did to a
group of Israeli diamond cutters who attempted to build up a large inventory
of their own in the late 1970's. Frankly, OPEC and the Latin American
drug cartels are dismal failures by comparison, at least partially because they
have never been able to exercise control over the demand for their product.
But even DeBeers may be mortal. As Australian and,
more notably, Russian producers have started to avoid the DeBeers Central Selling
Organization, DeBeers finds itself in the unaccustomed position of being in
less than total control of the diamond supply. Even worse, these outsiders
are able to hitch a free ride on DeBeers' marketing efforts, since a diamond,
is after all, a diamond.
Or at least it used to be. In what is surely a response
to a perceived loss of control, DeBeers has begun etching the DeBeers name and
a 'security number' on diamonds in order to try to create a brand in what has
traditionally been a completely brandless industry. Why? Russian
and Australian diamonds may be one reason, and another is undoubtedly the coming
threat of synthetic diamonds. It has been commercially viable to create
industrial grade diamonds in the lab since the 1950's, and larger, gem quality
diamonds are beginning to be available as well. The first specimens from
the 1970's were noticeably yellow (as are many natural diamonds) but the processes
are slowly improving. GE, for one, has created synthetic diamonds which
are actually harder and denser than naturals by using carbon-13 instead of the
carbon-12 that makes up 99% of natural diamonds. The Russians are also
making synthetics, and they are less likely to be scrupulous in identifying
them as such than GE is. Synthetic stones have been found in Russian diamond
shipments, and as technology improves, it may soon be impossible to tell these
'fakes' from natural diamonds. Of course, they won't have a DeBeers security
number on them, and I certainly wouldn't put it past DeBeers to convince us
that the number makes their diamonds worth the ten-fold higher price.
Who knows? Maybe a hundred years from now, when flawless
synthetic diamond is cheaper than glass (carbon is, after all, pretty much free),
people will still be paying two months salary for the flawed, colored, 'real
thing'. It's just a shame I won't be around to see the masterstroke of
advertising that convinces our great-great-grandchildren why it is that only
imperfect stones can demonstrate their perfect love.
