Except for those few stones that have been permanently lost, every diamond that has been found and cut into a gem since the beginning of time still exists today. This historic inventory, which overhangs the market, is literally in the public's hands. Some hundred million women wear diamonds on their person, while millions of others keep them in safe deposit boxes or strong boxes as family heirlooms. It is conservatively estimated that the public holds more than five hundred million carats of gem diamonds in this above-the ground inventory, 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 prodigious half billion carat overhang of diamonds must be prevented from ever being put on the market. The moment a significant portion of the public began selling diamonds from this inventory, the price of diamonds could not be sustained. For the diamond invention to survive, the public must be psychologically inhibited from ever parting with their diamonds.

In developing a strategy for De Beers in 1953, N. W. Ayer noted: "Diamonds do not wear out and are nor consumed. New diamonds add to the existing supply in trade channels and in the possession of the public. 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." The advertising agency's basic assignment was to make women value diamonds as permanent possessions, not for their actually worth on the market. It set out to accomplish this task by attempting through subtly designed advertisements to foster a sentimental attachment to diamonds which would make it difficult for a woman to give them up. Women were induced to think of their diamonds as their "best friends." 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 included individuals who inherit diamonds, had to remain convinced that diamonds retained their monetary value. If they saw price fluctuations in the diamond market and attempted to dispose of them to take advantage of these changing prices, the retail market would become chaotic. It was therefore essential that at least the illusion of price stability be maintained.

The extremely delicate positioning of the "overhang" provides one of the main rationalizations for the cartel arrangement. Harry Oppenheimer explained the unique situation of diamonds in the following terms: "A degree of control is necessary for the well being of the industry, not because production is excessive or demand is falling, but simply because wide fluctuations in price, which have, rightly or wrongly, been accepted as normal in the case of most raw materials, would be destructive of public confidence in the case of a pure luxury such as gem diamonds, of which large stocks are held in the form of jewelry by the general public." During the periods when the production from the mines temporarily exceeds the consumption of diamonds, which is determined mainly by the number of impending marriages in the United States and Japan, the cartel can preserve the vital illusion of price stability by either cutting back the distribution of diamonds at its London sights or by itself buying back diamonds at the wholesale level. The underlying assumption is that as long as the general public never sees the price of diamonds fall, they will not become nervous and begin selling the hundreds of millions of carats worth of diamonds that they hold from prior production. If this overhang ever reached the market, even De Beers and all the Oppenheimer resources could not prevent the price of diamonds from plummeting.

Before the advent of the twentieth century and the mass marketing of diamonds, the "overhang," though it existed, was far less of an imminent danger. Diamonds were then considered to be the almost exclusive possession of the aristocrats and wealthy elite, who were not expected to precipitously sell their jewels-except under the direst circumstances. In times of revolution, however, this stock did threaten to come cascading onto the market. When the Czar of Russia was deposed in 1917, the Bolsheviks announced that they were selling the mass of diamonds that his family had accumulated over the centuries. The fear that this stockpile of diamonds would come onto the market depressed world diamond prices for over a year. Then Solly Joel, the nephew and heir of Barney Barnato, who controlled the diamond syndicate in London, offered the Bolsheviks one quarter million pounds for the entire hoard sight unseen. The Bolsheviks, desperately in need of cash to finance their revolution, accepted the offer, and delivered the diamonds in fourteen cigar boxes to London. Joel then assured the other diamond merchants that he would keep these diamonds off the market for years, and panic subsided.

With the bulk of the diamonds in the hands of the general public, the problem of the overhang became much more difficult to handle. When the demand for diamonds almost completely abated after the crash of 1929, De Beers shut down the supply of diamonds by closing its mines and buying the production of independent mines for its stockpile in London. It could not, however, prevent diamonds from the overhang seeping into the market. Prices for small gems fell to $5 a carat. De Beers, already heavily in debt, continued through the 1930s to borrow money to buy back as many of these diamonds as it could absorb. But despite all these efforts, enough of the overhang came onto the market to make it impossible for jewelers to buy back diamonds. Public confidence in diamonds as a store of value was nearly destroyed, especially in Europe, and it required more than a generation before diamonds were again to reach their 1929 price level.

In the 1960s, the overhang again threatened to pour onto the market when the Soviet Union began to sell its polished diamonds. De Beers and its allies now no longer controlled the diamond supply. De Beers realized that open competition with the Russians would inevitably lead to "price fluctuations," as Harry Oppenheimer gingerly put it. This, in turn, would undoubtedly weaken the public's carefully cultivated confidence in the value of diamonds. Since Oppenheimer assumed that neither party could afford risking the destruction of the diamond invention, he offered the Soviets a straightforward deal: "a single channel" for controlling the world supply of diamonds. In accepting this arrangement, the Russians became partners in the cartel, and co- protectors of the diamond invention. De Beers then devised the "eternity ring," made up of hundreds of tiny Soviet-sized diamonds, which could be sold to an entirely new market of married women. The advertising campaign designed by N. W. Ayer was based on the theme of recaptured love. Again, sentiments were born out of necessity: American wives received a snake-like ring of miniature diamonds because of the needs of a South African corporation to accommodate the Communist Russia.

As the flow of Soviet diamonds continued into London at an ever-increasing rate, De Beers strategists came to the conclusion that this production could not be entirely absorbed by "eternity rings" or other new concepts in jewelry. They began looking for diamond markets for miniature diamonds outside the confines of the United States. Even though they succeeded beyond their wildest expectation in creating an instant diamond "tradition" in Japan, they were unable to create similar traditions in Brazil, Germany, Austria or Italy. Despite the cost involved in absorbing this hoard of Soviet diamonds each year, De Beers prevented, at least temporarily, the Soviet Union from taking any precipitous actions that might cause the diamond overhang to start sliding down onto the market.

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.

Whether this pessimistic scenario ever unfolds remains to be seen. De Beers has billions of dollars of its cash reserves to buy back diamonds,. Nevertheless, with new diamond mines in Australia and Canada coming on stream, the time is past when De Beers can manipulate prices merely through the expedient of shutting down mines.

The diamond invention is neither eternal nor self-perpetuating. It survived for the past half 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. De Beers satisfied the first of these conditions by owning and controlling the major sources of diamonds and the second of these conditions by fostering the illusion in the public's mind that diamonds are forever. Both achievements may prove to be temporary phenomena. The diamond craze of the twentieth century could end as abruptly as the tulip mania of the eighteenth century. Under these circumstances, 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.