The Diamond Invention book

Control of the world’s diamond mines was a necessary but not sufficient condition for perpetuating the price of diamonds. If the public’s appetite for diamonds decreased precipitously, as it had in the Depression, or women’s fashions suddenly changed, as it had with coral and pearls, De Beers would not be able for long to keep prices from collapsing, no matter how ruthlessly it cut back on production from the mines. To complete the diamond invention, De Beers had to control demand as well as supply, and this required some manipulation of the psyche of the diamond buyer. What was necessary was the creation of a mass mentality in which women would perceive diamonds, not as precious stones that could be bought or sold according to economic conditions or fashions, but as an inseparable part of courtship and married life.

In September 1938, Harry Oppenheimer journeyed to New York City to investigate the possibilities of creating such a diamond mind. He was met by Gerald M. Lauck, who was the president of one of the leading advertising agencies in the United States, N. W. Ayer. Lauck and N. W. Ayer had been recommended to Oppenheimer by the Morgan Bank, which had helped his father consolidate his financial empire. His bankers were clearly concerned by the worldwide decline in the price of diamonds.

In Europe, where diamond prices had collapsed during the Depression, there seemed little possibility of restoring public confidence. In Germany, Austria, Italy and Spain, the notion of giving diamond rings to commemorate an engagement had never taken hold. In England and France, diamonds were still presumed to be a jewel for aristocrats rather than the masses. And in any case, 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’ diamonds.

Even though the “tradition” of giving diamond rings for engagements in America was barely fifty years old, it had survived the Depression. In fact, in 1938, some three quarters of all the cartel’s diamonds were sold for engagement rings in the United States. Up until this point, however, American men tended to buy the smaller and poorer quality diamonds, averaging under $80 apiece, for their loved ones. Oppenheimer and the bankers believed that Americans could be persuaded to buy more expensive diamonds through an advertising campaign.

During their initial meeting, Oppenheimer suggested to Lauck that his agency prepare a plan for creating a new image for diamonds among Americans. He assured him that De Beers had not contacted any other American advertising agency with this proposal, and if the N. W. Ayer plan met with his father’s approval, it would be the exclusive agents for the placement of the newspaper and radio advertisements in the United States. Moreover, Oppenheimer offered to underwrite the costs of the research necessary for developing the scheme. Lauck, envisioning a new and potentially lucrative account, instantly accepted the offer.

In their subsequent investigation into the American diamond market, N. W. Ayer’s staff found that ever since the end of World War I in 1919, there had been a consistent decline in both the number and the quality of the diamonds sold in America. During this nineteen-year period, the total number of diamonds, measured in carats, had declined by 50 percent; while the price of the diamonds, measured in dollar value, had declined by nearly 100 percent. This suggested that well before the Depression, Americans had begun buying poorer quality and cheaper diamonds. They concluded, according to an Ayer memo, that the present 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 significantly alter 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 vitalize the association in the public’s mind between diamonds and 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. The study found that there was already an increasing number of marriages among middle-income wage-earners who were “the backbone of the diamond market,” and that, if properly cultivated, this trend could provide fertile grounds for diamond sales in the future.

Since the Ayer plan to romanticize diamonds required subtly altering the public’s picture of the way that a man courts a woman, the advertising agency strongly suggested exploiting the relatively new medium of motion pictures. “Motion pictures seldom include scenes showing the selection or purchase of an engagement ring to a girl,” the Ayer proposal noted. “It would be our plan to contact scenario writers and directors and arrange for such scenes in suitable productions.” Since movie idols were then paragons of romance for the mass audience, they would be given diamonds to use as their symbols of indestructible love.

In addition, the proposal suggested planting news stories and society photographs in selected magazines and newspapers that would reinforce the link between diamonds and romance. There would be stories about the size of diamonds that celebrities presented to their loved ones, and photographs that conspicuously focused on the glittering stone on the finger of a well-known woman. And there were to be radio programs where fashion designers talked about the trend towards diamonds.”

The Ayer plan also envisioned using the British royal family to help foster the romantic allure of diamonds. It observed, “Since Great Britain has such an important interest in the diamond industry, the royal couple could be of tremendous assistance to this British industry by wearing diamonds rather than other jewels.” Subsequently, Queen Elizabeth did go on a well-publicized trip to the South African diamond mines, and she accepted a diamond from Oppenheimer.

On April 6, 1939, H. T. Dickinson, a director of De Beers responsible for international diamond sales, arrived in New York on board the Queen Mary. At 4 PM that afternoon, he was in the offices of N. W. Ayer discussing the implementation of the advertising campaign. Initially, he found it difficult to believe that diamonds had steadily lost ground to other luxury goods in America, but after reviewing the data, he accepted the N. W. Ayer thesis: a new image for diamonds was needed. Within two months, De Beers authorized Ayer to begin its campaign.

The advertising agency wasted little time in approaching the film studios in Hollywood. In its 1940 report to De Beers, it noted, “A long series of conferences with Paramount officials, capped by your own efforts, succeeded in changing the title [of a film] from ‘Diamonds Are Dangerous’ to ‘Adventures in Diamonds’.” It then reported that in another film called Skylark, it had succeeded in inserting a “long scene” in dealing with the selection of a diamond clip and bracelet for the star Claudette Colbert; and that in the film, That Uncertain Feeling, Merle Oberon wore $40,000 worth of diamond Jewelry. On the basis of these initial results, N. W. Ayer strongly recommended that continued efforts be made to manipulate Hollywood films. It reasoned that Americans “have not been conditioned by their environment to diamond purchases. Aside from the engagement rings, they have no diamond tradition. But they are going to be influenced by … what they see their favorite movie star wear.”

To further advance the romantic image of diamonds, N. W. Ayer placed a series of lush four-colored advertisements about diamonds in the New Yorker and other magazines presumed to mold elite opinion. These advertisements featured reproductions of famous paintings by such respected artists as Picasso, Berman, Dali and Dufy, which were intended to convey the idea that diamonds were also unique works of art.

When the Second World War began in Europe, N. W. Ayer fed numerous stories to the press suggesting that the diamond market would not be adversely affected by these developments. Even though the war, in fact, virtually ended the gem diamond business, with mines being shut all over Africa and cutting centers in Europe being abandoned, the planted stories, which were widely circulated by the wire services, carried such optimistic titles as “Diamond, King of Gems, Reigns Supreme Despite War,” “Diamond Supply Unhurt by War,” “War Gives Impetus to Diamond Cutting,” “Marriage Increases Indicated by Rise in Diamond Sales,” and “How Diamonds Spark the Wings of War and Peace.”

By 1941 the advertising agency reported to its client that it had already achieved impressive results in its campaign to alter the American public’s perception of diamonds. Since its inception, the sale of diamonds had soared 55 percent in the United States, reversing the previous downward trend in retail sales. N. W. Ayer stated in the accompanying memorandum to De Beers “the entire structure of your diamond organization for the duration of the war rests upon the ultimate sale of diamonds to consumers in the United States. … Your problem is to cultivate the desire to purchase diamonds for their own sake.” The advertising agency saw no reason to be overly modest in summarizing its own contribution. It noted in the report that its campaign 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. . . .”

As far as future campaigns were concerned, N. W. Ayer pointed out that paid advertisements themselves were not sufficient for solidifying the credibility of the diamond. “It is the responsibility of the publicity effort to gain access to the editorial and news columns of magazines and newspapers, and thereby become part of the publication itself,” the report added. “In this manner, it carries the authority of a disinterested source and consequently creates interest among readers.”

This technique of distributing its message disguised as a news story proved especially effective when it became necessary to foster the idea that diamonds were contributing to the war effort and buying gems amounted to an act of patriotism. During the war De Beers also called on N. W. Ayer to defuse the charge that it was an international cartel. A penciled memorandum from De Beers in 1944 dealing with its public relations notes: “Problem to convince American public that the Diamond Industry, though an admitted monopoly, operates fairly and in a manner that accords with American interests. This must be done in a way that will stand up under direct attack even from a government source.” It was not until after the war ended, when millions of soldiers returned to civilian life, that N. W. Ayer received an expanded budget from De Beers to proceed with the next stage of its campaign to make diamonds part of the romantic consciousness of the American public. In Its 1947 strategy, the advertising agency strongly emphasized a psychological approach. “We are dealing with a problem in mass psychology. We seek to . . . strengthen the tradition of the diamond engagement ring-to make it a psychological necessity capable of competing successfully at the retail level with utility goods and services.” It defined as its target audience “some 70 million people 15 years and over whose opinion we hope to influence in support of our objectives.” Since the point of the exercise was to cultivate a sustainable image in the public mind, rather than merely increase short-term sales, the advertising agency cautioned that “the ordinary so-called ‘hard-hitting’ techniques are not for you, for they are the very methods that helped to cheapen the diamond in the opinion of the public during the years before our association.”

Instead, N. W. Ayer outlined a far more subtle program which included arranging for lecturers to visit high schools across the country.”All of these lectures revolve around the diamond engagement ring, and are reaching thousands of girls in their assemblies, classes and informal meetings in our leading educational institutions,” it explained in a memorandum to De Beers. The advertising agency also organized in 1946 a weekly service called “Hollywood Personalities,” which provided 125 leading newspapers with descriptions of the diamonds worn by “screen stars.” And it continued its efforts to focus news coverage on celebrities displaying their diamond rings as a symbol of romantic involvement.

In 1947, the agency even commissioned a series of portraits of “engaged socialites.” The idea was to create prestigious “role models” for the poorer middle-class wage earners. The advertising agency frankly explains in Its 1948 strategy paper, “We spread the word of diamonds worn by stars of screen and stage, by wives and daughters of political leaders, by any woman who can make the grocer’s wife and the mechanic’s sweetheart say ‘I wish I had what she has.’ ” Aside from the romantic connection, N. W. Ayer also found that it could subtly exploit the premarital insecurity women were found to have in their relations with men. Even though the tradition of diamond engagement rings was, at least in its popular form, mainly an invention of the late nineteenth century, the advertising agency decided to give it deep historical roots and establish it in the public’s mind as an inseparable part of the marriage process. “We keep people thinking of the diamond as the traditional symbol of the pledge to wed,” it explains in the 1948 memorandum. “The tradition itself is kept before them its origin, its meaning, its history. Told in different forms, in articles, in short ‘filler’ items, in pictures, this story goes from our desks to appear in books, magazines and newspapers.” As evidence of the success of this campaign of surreptitious authoring of news stories, it cited the fact that “newspapers have carried our items about the engagement diamonds of a list of women that range from Mrs. [Harry S.] Truman to the ‘glamour girls’ of Hollywood.” It suggested that these carefully constructed news stories were especially effective in planting ideas in the public mind, noting, “Such items develop the feeling, more convincingly than mere repetition of the statement could do, that the diamond is in fact the only accepted symbol of engagement.”

De Beers needed a slogan for diamonds that expressed both the theme of romance and of legitimacy. Then in 1948 a N. W. Ayer copywriter came up with the caption “A Diamond Is Forever,” which was scrawled on the bottom of a picture of two young lovers on a honeymoon. Even though diamonds can be in fact shattered, chipped, discolored or incinerated to an ash, the concept of eternity perfectly captured the magical qualities that the advertising agency wanted to impute to diamonds. Within a year, “A Diamond Is Forever” became the official logo of Dc Beers.

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 diamonds they can afford.”

To remedy these problems, the advertising agency argued that “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 constantly searching for new ways to influence American public opinion during this period. Not only did it organize a service to “release to the women’s pages [of daily newspapers] all the fresh material that we can find or create about 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 Bureau,” which placed a quasi-official stamp of 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,” it 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.” Among such successes, for example, the agency pointed to an article in the National Geographic exalting diamonds that it had helped prepare.

When sociologists such as Thorstein Veblen popularized in his book The Theory of the Leisure Class the idea that Americans were motivated in their purchases, not by utility, but by “conspicuous consumption,” N. W. Ayer proposed applying this sociological insight to the diamond market. “The substantial diamond gift can be made a more widely sought symbol of personal and family success an expression of socio-economic achievement.”

To exploit this psychological need of Americans to conspicuously display symbols of their wealth, N. W. Ayer specifically recommended: “Promote the diamond as one material object which can reflect, in a very personal way, a man’s … success in life.” Since this campaign would require advertisements addressed to upwardly mobile men, the ad agency suggested that ideally they “should have the aroma of tweed, old leather and polished wood which is characteristic of a good club.” In other words they were to evoke in men the sweet smell of success.

To further develop the diamond mind in America, N. W. Ayer asked both psychologists and sociologists to analyze “basic human wants,” such as “comfort,” “freedom from fear,” “longer life,” “the ability to attract the opposite sex,” and “social approval.” It justified this psychological investigation to De Beers in the following terms: “An advertiser who can make a close and believable association between one or more of the “basic human wants” and his product, can rouse a more vigorous and more universal demand for his product and in the process tend to separate this demand from control by consumers’ current economic situation.”

The point of this manipulation was to create in consumers a desire for diamonds that had been subliminally linked through advertising with other “basic human wants.” Dr. James Bossard, a professor of sociology at the University of Pennsylvania, observed in a report that he prepared for N. W. Ayer: ~ The engagement ring . . . is a symbol of the ability to get your man in the competitive race. . . . It has the further features that it is not easily given (too expensive), it is visible (it sparkles), it is permanent (other things wear out), and it advertises the economic status of the giver. . . . Large scale society makes for impersonal relations. One result of this is to place marked emphasis upon outward manifestations and visible evidence.” He concluded “Conspicuous consumption becomes more impressive than quiet confidence. . . . Symbols are indicators of status…. A formal and visible symbol of approaching marriage becomes a vital necessity in a large office, a big university, a large plant.”

In its strategy plan, N. W. Ayer strongly endorsed the professor’s analysis. It added also that in terms of fashion “women are conditioned to want what is shown in the fashion news.” It asserted that through psychologically designed advertising and public relations, women could be further conditioned to think of diamonds as a necessity of life.

For some sixteen years, N. W. Ayer carefully cultivated the romantic image in the public’s mind that a diamond was a unique manifestation of nature and the rarest of all precious objects in the world. Then, in 1955, the General Electric Company announced with considerable fanfare that it had invented a process for manufacturing diamonds from ordinary carbon, which was the commonest element on earth. At the behest of De Beers, the advertising agency immediately began feeding stories to the press intended to dispel fears that the mass production of cheap diamonds was imminent.

The crisis of synthetic diamonds soon passed from public attention. N. W. Ayer reported back to De Beers, “At the time of the [General Electric] announcement there were, quite naturally, some expressions of uneasiness in the gem trade . . . but with each passing week the announcement is falling into perspective.” It added, “We have fortunately been in a position to counsel trade organizations on communicating a relaxed point of view to their members.”

Toward the end of the 1950s, N. W. Ayer reviewed its achievements in fostering, if not wholly inventing, the diamond engagement tradition. It reported to its client in South Africa that twenty years of subtle but well orchestrated 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 noted with unmistakable pride of accomplishment. “To this new generation a diamond ring is considered a necessity to engagement to 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 “deferred the purchase” rather than for going it. Not only had the twenty-year advertising campaign helped De Beers “sell current production” from its diamond mines, but, more importantly, it had elevated diamonds in the American mind to “cherished possessions” which, according to N. W. Ayer, helped “keep previous production in the hands of the consumer . . . and off the retail market.” Even in a severe economic pinch, diamonds would not be resold by consumers who had subsumed the advertising pitch “A Diamond Is Forever.”

N. W. Ayer proposed that instant engagement traditions should be invented for other countries. In its 1960 strategy plan it suggested, “The idea of developing a public diamond engagement tradition in countries where it does not exist . . . has been volunteered by leading jewelers in those countries.” It noted that Germany and Sweden would be two outstanding targets for such an invention. Specifically, it said that an international engagement ring tradition would: “enlarge the market for smaller diamonds . . . insure regular growth by broadening the market base . . . [and] help to keep diamonds in safe hands by making them cherished possessions of more people throughout the world.” To this end, the foreign language editions of Reader’s Digest were recommended as a means of introducing the diamond message abroad.

N. W. Ayer recognized in its analysis that some countries already had “firmly rooted” traditions of exchanging simple gold rings to symbolize the engagement, and that in these countries it would not be possible to uproot instantly the existing tradition. Initially, it therefore suggested a campaign to associate diamonds with a “gift of love.”

The campaign to internationalize the diamond mind 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 Japan, Germany and Brazil, to place most of its international advertising. Within ten years, De Beers succeeded even beyond its most optimistic expectations in creating a billion-dollar-a-year diamond tradition in Japan. In Germany and Brazil, De Beers met with more moderate success.

In America, which still remained the ultimate market for most of De Beers’ diamonds, N. W. Ayer developed a plan for insulating diamond sales from the cyclical swings in the economy that affected most luxury goods. In 1960, it suggested a series of advertising messages which would gradually induce consumers into perceiving diamonds in terms of sentiments, such as love, instead of valuable gems which could be disposed of in hard times. Specifically, the “engagement advertising strategy” for the 1960s involved three steps:

1. To attach to the diamond the meaning of the engagement period;

2. Conversely, to identify with the engagement period the romance, beauty, uniqueness, value and permanence of the diamond;

3. To express these ideas frequently to a clear majority of the U.S. families capable of responding.

N. W. Ayer then outlined a “psychology” for sentimentalizing diamonds: “The first time that a man spoke to a woman of his love, devotion, and expressed the wish never to be parted from her … the symbol of the first milestone was a diamond. The engagement diamond. This diamond ring … was a badge for the outside world to see. It gave the woman her status as a woman, the prestige of a woman. Nothing else could take the place of the diamond.” However, as the years go by, the woman needs further reassurance that her husband still loves her, according to this psychological profile. “Candies come, flowers come, furs come,” the study continues, but such ephemeral gifts fall to satisfy the woman’s psychological craving for “a renewal of the romance.” A diamond, however, which originally symbolized the commitment of love, could serve to fill this emotional “later-in-life” need.

The advertising agencies therefore recommended that De Beers initiate a program of advertisements which would instill in the public’s mind that the gift of a second diamond, in the later years of marriage, would be accepted as a sign of “ever growing love.” It argued that the development of a new “later-in-life” diamond market would be necessary to absorb the increasing supply of diamonds from South Africa, because the number of engagement diamonds was more or less fixed by the number of marriages in America. Specifically, it recommended a campaign to “reach deeper into the population to sell gift (later-in-life) diamonds in order to increase demand,” and in 1962 it asked 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 since the diamond mind had to be now expanded to accommodate the surfeit of Siberian diamonds that De Beers undertook to market for the Russians. Almost all of these diamonds were under one-half carat in their uncut form, and there was no ready retail outlet for millions of such tiny diamonds. When it made its secret deal with the Soviet Union, De Beers had expected the production from the Siberian mines to gradually decrease. Instead, it accelerated at an incredible pace, and De Beers was forced to restructure its sales strategy.

Up to. this point, De Beers itself had been largely responsible for reducing the market for small, under one-carat diamonds. Through its twenty-year advertising campaign, it had encouraged American women to think of the size of a diamond as a status symbol or “badge”: The larger the diamond, the more status it represented. During this period, N. W. Ayer had surreptitiously authored film scenario and news stories which constantly depicted women as measuring a man’s commitment by the number of carats in the diamond he gave her. The engagement reports on celebrities that N. W. Ayer circulated also emphasized “caratage,” or size, rather than quality. Diamonds were portrayed as “a girl’s best friend” if they were conspicuously large. Now, however, De Beers had N. W. Ayer to reverse its theme: Women were no longer to be led to equate the status and emotional commitment in an engagement with the sheer size of the diamond. Instead, a “strategy for small diamond sales” was outlined which involved stressing the “importance of quality, color and cut” over size, and in advertisement pictures substituting “one-quarter carat” rings for “Up to 2 carat” rings. Moreover, the advertising, agency began in its international campaign to “illustrate gems -as small as one-tenth of a carat and give them the same emotional importance as larger stones.” The symbolic content of the news releases was also to be manipulated so that women would be induced to think of diamonds, regardless of their size, as objects of perfection: A small diamond could be as perfect as a large diamond.

The new campaign met with considerable success. The average size of a diamond, which was one carat in 1939, fell to none-quarter carat by the late 1970s. This smaller size coincided almost exactly with the average size of the Siberian diamonds that De Beers. was now distributing. However, as American consumers became gradually accustomed to the idea of buying smaller diamonds, they began to perceive of the larger diamonds as “flashy” and ostentatious. The advertising success was beginning, however, to take on the aspects of a financial disaster. In its 1978 strategy report, N. W. Ayer notes “a supply problem has developed . . . that has had a significant effect on diamond pricing.” It then explains that this problem proceeds from its long-term campaign to stimulate the sale of small diamonds. “Owing to successful pricing, distribution and advertising policies over the last 15 years, demand for small diamonds now appears to have significantly exceeded supply even though supply, in absolute terms, has been increasing steadily.” But whereas there was not a sufficient supply of small diamonds to meet the demands of consumers, N. W. Ayer reported that “large stone sales [one carat and up] … have maintained the sluggish pace of the last three years.” Because of this, the memorandum continued, “large stones are being . . . discounted by as much as 20%.” In other words, by heightening the appeal of minute diamonds, the advertising campaign had inadvertently diminished the salability of the larger diamonds. Since the larger stones were far more profitable to sell than the smaller ones, De Beers and its clients were being deprived of potential profits.

Despite this embarrassing “supply problem,” N. W. Ayer argued that “small stone jewelry advertising” should not be totally abandoned. “Serious trade relationship problems would ensue if, after 15 years of stressing ‘affordable’ small stone jewelry, we were to drop all of these programs,” it pointed out. Instead, it suggested a subtle change in “emphasis” in presenting diamonds to the American public. In the advertisements, it planned such “adjustments” as replacing smaller diamonds with one carat and over stones, and resuming both an “informative advertising campaign” and an “emotive program” which would serve to “reorient consumer tastes and price perspectives towards acceptance of solitaire [single stone] jewelry rather than multi-stone pieces.” Other “strategic refinements” it recommended were designed to restore the large diamond to being a visible symbol of conspicuous consumption. “In fact, this [campaign] will be the exact opposite of the small stone informative program that ran from 1965 to 1970 that popularized the ‘beauty in miniature’ concept. . . .” With an advertising budget for America of nearly ten million dollars, N. W. Ayer appeared confident that it could bring about this “reorientation.”

N. W. Ayer further attempted to plumb the diamond mind in the mid-1970s by retaining the firm of Daniel Yankelovich, Inc., to poll a representative sample of the American public on its attitude toward diamonds. The study was continued over five years, and from this highly sophisticated analysis of public opinion emerged a rather surprising picture of a man, rather than a woman, as “the key figure in the diamond jewelry acquisition process.”

In the case of engagement rings, men played a dominant role in 88 percent of the purchases; indeed, in 46 percent of the purchases, the man bought the ring without any participation whatsoever from his fiancee. In purchasing other pieces of diamond jewelry, the study found that women also only rarely participated in the decision. “Not only is a woman unlikely to buy diamond jewelry for herself,” the study continued, “she is also unlikely to buy diamonds for anyone else.” The essence of the diamond transaction was that it was a gift from man to woman.

The gift, moreover, 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 Yankelovich study pointed out. N. W. Ayer explored this “surprise factor” in an analysis that observed: “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 women had 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.” from the woman; then, “at some later point in time, he makes the diamond purchase decision” to surprise the woman.

Through a series of “projective” psychological questions, meant “to draw out a respondent’s innermost feelings about diamond jewelry,” the study attempted to further examine the curious semi-passive role played by women in the diamond relationship. The man-woman roles seemed to closely resemble the sex relations in a Victorian novel. “Man plays the dominant, active role in the gift process. Woman’s role is more subtle, more oblique, more enigmatic. . . .” Like Victorian sex, women seemed to believe there was something improper about receiving a diamond gift. They spoke about large diamonds as “flashy, gaudy, overdone and otherwise inappropriate.” Yet, through its psychological probing of the female mind, the study found, “Buried in the negative attitudes … lies what is probably the primary driving force for acquiring them. Diamonds are a traditional and conspicuous signal of achievement, status and success.” It noted, for example, “A woman can easily feel that diamonds are ‘vulgar’ and still be highly enthusiastic about receiving diamond jewelry.” The element of “surprise, even if it is feigned, plays the same role of accommodating dissonance in accepting a diamond gift as it does in prim sexual seductions: it permits the woman to pretend that she has not actively participated in the decision. She thus retains both her innocence and the diamond.”

In projecting from this data a strategy for De Beers for the future, N. W. Ayer suggested that the objective of advertising was “to perpetuate the positioning of diamond ‘jewelry as the most special of all gifts, so that men will continue to ‘know’ and women continue to ‘teach’ that diamonds are acceptable and wanted.” While the advertising agency candidly recognized that “available research has not shed light on how the man learns that a diamond gift would be acceptable to his wife,” it nevertheless pressed for a campaign of highly emotive advertising that would reinforce this cryptic male “awareness” of female “receptivity.” Specifically, it suggested that the “tone of the copy” should project “a strong sense of confidence in the voice of the giver that the gift will be especially well received.” Ideally, the male reader should be enabled “to project himself into the situation and . . . play the role of the giver and anticipate the rewards associated with a gift of diamonds.” For example, an advertisement might depict a beautiful woman, gushing with love and admiration, as she is surprised by the diamond gift while the male giver stands smugly by. No matter how uninterested men might be in diamonds themselves, these advertisements should convey “the extraordinary reaction that can be expected from the gift.” The artwork in these advertisements should, N. W. Ayer further recommended, play to “a known positive attitude in women that a gift of this sort is preferred as a surprise.”

Finally, “A significant male appeal implicit in the surprise situation is the strong implication that the gift will be a success.” N. W. Ayer concluded that such a campaign would provide “an emotional appeal that is highly motivating to men.”

For the continued shaping of the diamond mind, the implications of this psychological research were clear. To induce men to buy women diamonds, advertising should focus not on the qualities and beauty of the diamond itself, but on the emotional impact of the “surprise” gift transaction. In the final analysis, men were not moved to part with their earnings by the value, aesthetics or tradition of diamonds, but by the expectation that a “gift of love” would enhance their standing in the eyes of their beloved. On the other hand, women accepted the gift as a tangible symbol of their status and achievement. Playing off the duality of the male-female relationship, N. W. Ayer helped De Beers expand its sales of diamonds in the United States from a mere $23 million in 1939 to over $2 billion, at the wholesale level by 1980. In two-score years, the value of its sales had increased nearly a hundred-fold. In comparison, the expenditure on advertisements, which began at a level of only $200,000 a year and gradually increased to $10 million, seemed a prudent investment by De Beers. It had, after all, helped evolve an American diamond mind capable of absorbing the abundance of diamonds from both Africa and Siberia.

Through the brilliant financial maneuvers of Sir Ernest Oppenheimer, the diamond cartel had succeeded in gaining control of virtually all the diamond mines in the world by the early 1950s. It had made its arrangements with the government of South Africa, the colonial administrations in Angola, the Congo and Sierra Leone, and with Dr. Williamson in Tanganyika. It was fully backed by the British, Belgian and the French governments, and it was recognized by every other government concerned as the official channel for the diamond trade. There were still unofficial channels, however, that the diamond cartel did not control: the smuggling routes that led from the diamond mines and diggings in southern and western Africa to entrepots such as Monrovia and Beirut. Since the African governments did not have either the techniques or resources at their disposal to interdict the diamond smugglers, Sir Ernest decided to recruit his own diamond soldiers. In December of 1953, he instructed his London office to track down and contact Sir Percy Sillitoe.

Sillitoe had been, until November of 1953, the head of the British counterespionage service known as MI-5. During the Second World War, he had organized one of the most ingenious spy operations in the history of espionage. It was called the double-cross system, and it involved converting all the German spies in England into British double agents. Since the Germans accepted the reports of these spies as bona fide intelligence, Sillitoe and his double committee, which included Harry Oppenheimer’s tutor at Oxford, Sir John Masterman, were able to feed the Germans a false picture of British activities. After the war, Sillitoe worked closely with American and French intelligence. In 1950, however, the British government was severely embarrassed by the defection of two of its diplomats from Washington “Donald Maclean and Guy Burgess” to Moscow, and the British security services came under increasing criticism. Sillitoe, who had reached the age of sixty-five, was allowed to retire in the midst of the scandal. Since retired intelligence chiefs are expected to fade quietly away, Sillitoe moved to the seaside town of Eastbourne in southern England and worked in a local sweet shop owned by relatives, selling chocolates and other confectioneries.

When Sillitoe received the invitation from Oppenheimer, he was behind the counter of his sweet shop. Within a matter of days, he had abandoned the confectionery and was on a plane flying to Africa.

At the airport in Capetown, he was met by Oppenheimer’s chauffeur and immediately driven to the village of Mulzenberg on the Indian Ocean. He arrived at a beautifully landscaped estate where Oppenheimer and his family were spending their Christmas vacation. In their initial meeting, Oppenheimer briefed Sillitoe on the smuggling problem. He explained that the smuggling of diamonds not only deprived De Beers of the value of the stolen diamonds, but far more serious, it threatened to undermine the monopoly prices for diamonds that De Beers had established. He estimated that somewhere between 10 and 20 percent of all the diamonds reaching cutting centers were smuggled goods. These illicit diamonds were undercutting De Beers’ prices. Moreover, if diamond dealers and cutters had an alternate source from which to buy their diamonds, they would be less willing to accept De Beers’ rigid conditions for doing business in the diamond trade. Oppenheimer was emphatic: He wanted the smugglers stopped.

Sillitoe admittedly had no knowledge about the diamond business, but he suggested that the techniques of counterintelligence that he had employed during the war against the Germans could effectively be used against smugglers. If some of the Individuals who illegally bought and sold diamonds could be identified, they could be “turned” into double agents for the cartel. These agents then could be used to manipulate the diamond smugglers higher up in the chain. To accomplish this feat for De Beers, Sillitoe suggested that he hire a half dozen top intelligence officers from the British secret service. These men would form the nucleus of a private intelligence service for the cartel.

After giving the matter some consideration, Oppenheimer accepted Sillitoe’s proposal. De Beers would provide the financial support, and Sillitoe would have carte blanche to recruit an elite core of agents for the “International Diamond Security Organization,” as it was eventually called.

Sillitoe’s education in the diamond business began in 1954 with a tour of the mines. At the Kimberley mines, De Beers security officers briefed him on the various ways in which employees had smuggled diamonds out of the mining areas in the past. The methods ranged from using rubber band catapults to fling the diamonds over the barbwire fences to having a surgeon hollow out a niche in an ankle bone in which diamonds could be concealed under a bandage. The most common means was for individuals to simply swallow diamonds and then recover them once outside the compound. Because of the minute size of diamonds, it was virtually impossible to detect them except by X-raying the entire body. However, employees could not be subjected to constant X-rays without exposing them to lethal doses of gamma rays and thereby endangering their lives. X-ray examinations, therefore, could only be given to a small proportion of randomly selected workers each day. At best, the X-rav machine was a psychological deterrent to theft. Like the closed-circuit television cameras that conspicuously scanned back and forth at the mines, X-rays were another demonstration to black workers of the white man’s magic. But once the employees understood that these electronic devices had only a relatively small chance of detecting smuggled diamonds, their value as deterrents was seriously impaired.

Sillitoe found that these security procedures were far too passive to prevent sophisticated thefts. He suggested instead that De Beers employ more aggressive and imaginative methods; for example, radioactive paints had been successfully used for the surveillance of enemy agents in England. (In one case, this paint had been applied to the shoes of a Soviet diplomat in London, and then his trail had been followed by means of a Geiger counter.) Sillitoe proposed that a few diamonds be radioactively “labeled” with an invisible paint and then be conspicuously left around in areas where employees were likely to steal them. Assuming that the radioactive bait would be snatched up, a Geiger counter would click the moment the diamond passed through the gates of the compound. The thief then would not be arrested but followed, and in time the radioactive diamond would be sold to an intermediary. The intermediary could then be followed with the Geiger counter. Once located, he could be turned into an informer.

Such exotic security measures resulted in the recovery of only a few diamonds, however. Sillitoe next learned that the cartel’s problem was not the trickle of diamonds being stolen from its South African mines but the flood of diamonds that were smuggled out of west and central Africa every year. With two of his staff assistants, Sillitoe traveled to areas outside South Africa from which most of the diamonds seemed to come. He went to Aquatia in Ghana, Freetown and Yengema in Sierra Leone, Bakwanga and Luluaburg in the Belgian Congo, and Dar-es-Salaam and Mwadui in Tanganyika. In each of these countries, he was able to make contact with the intelligence officers whom he had previously worked with in his capacity as head of British counterintelligence. Most of these countries were still British colonies in 1954, and his former comrades in arms were willing to extend him a good deal of unofficial cooperation. The first objective, as Sillitoe’s deputy explained, was “to set up an intelligence network which would penetrate this underground railroad round the world.”

In South Africa, most diamond mines were volcanic pipes, which could be isolated behind electrified ten-foot high barbwire fences. In central and west Africa, however, most diamonds were “mined” from streambeds that meandered over tens of thousands of miles of jungle. To recover these diamonds, natives needed only a shovel and a pan. Even though the governments had granted concessions to various diamond mining companies associated with De Beers, and had in theory banned anyone else from digging for diamonds, it was in practice impossible to enforce these regulations.

The problem was particularly difficult in Sierra Leone, where the river banks were littered with diamonds. Not only was the government unwilling to police this vast area to prevent illicit digging but the local authorities explained to Sillitoe that most natives believed “the soil of Sierra Leone belonged to the Sierra Leoneans,” and not the diamond companies. At night, gangs of “pot-holers,” as they were called, would dig up the river banks and disappear at daybreak with the diamondiferous gravel. The pot-holers would then either sell their diamonds to Lebanese traders or directly to Mandango tribesmen, who, in turn, smuggled them across the open border to Liberia. By one means or another, it was estimated that more than half of Sierra Leone’s diamonds were sold in Monrovia as “Liberian” diamonds. Even though Liberia had in reality no diamond mines of any significance, fictive “mines” were created in the jungles to account for this enormous production of diamonds.

After carefully studying the situation, Sillitoe concluded that it would be futile to attempt to end the illicit mining in Sierra Leone by pot-holers. Even if Sierra Leone’s under staffed colonial police could be induced to arrest thousands of these diggers, other natives would take their place panning the rivers and mudholes. Instead, he decided to concentrate his efforts on controlling Lebanese middlemen who were behind the illicit traffic.

Initially, Sillitoe’s men recruited a number of clandestine agents in Sierra Leone and Liberia who would pretend to be independent diamond buyers. After making contact with the Lebanese, these agents offered to buy large quantities of smuggled diamonds at much higher prices than the cartel’s real competitors were offering.

The quantity of diamonds available on the illegal market staggered Sillitoe. He found he needed more than $5 million in “buy” money to maintain the intelligence operation, and to obtain such a large amount of hard currency in a British colony required the permission of the British government. Sillitoe managed, however, to persuade the British authorities that diamonds were an important factor in Britain’s precarious balance of payment equation, and he was then quickly granted permission to spend hard currencies to buy up smuggled diamonds.

By making major purchases of diamonds in black markets, Sillitoe’s agents were able to ferret out the middlemen trafficking in diamonds. Then, through surveillance and intercepted mail, they traced the traffic from the diamond fields of Sierra Leone through the entrepots of Liberia to the wholesale markets in Belgium. It turned out that reputable European merchants, who were also customers of the cartel, had been surreptitiously financing the African smugglers and one of the principal buyers of the smuggled goods was the Soviet Union, which then critically needed industrial diamonds to retool its factories.

Sillitoe realized that the illicit diamond traffic could not be ended decisively as long as the smugglers had high rewards for their goods and only minimal risks of being captured. He therefore decided to raise the stakes for the smugglers by hiring private armies of mercenaries to ambush their diamond caravans in the jungles.

The most resourceful of these mercenaries was Fred Kamil, a Lebanese trader then in his twenties. Kamil had for years extracted money from smugglers on the route that led through the swamps from Sierra Leone to Liberia and which was known as the “stranger’s trail.” With a group of gunmen, he also waylaid merchants and travelers who came down the narrow trail. In 1956, Sillitoe’s organization offered Kamil a highly attractive deal. He would be supplied with information from undercover informers about the exact movements of diamond shipments from Sierra Leone to Liberia to facilitate his ambushes. In return, he would turn the diamonds over to a De Beers subsidiary, and he would receive one-third of their value in cash. Kamil agreed to the alliance, since it would also mean that he would have police protection in Sierra Leone.

Many of the ambushes were bloody affairs. A caravan of a dozen or so Mandango tribesmen would emerge from the jungle in Sierra Leone and head for the bridge across the Mao River, which was the Liberian border. Suddenly, mines and flares would be detonated all around them. Then Kamil’s mercenaries would open fire with hunting rifles. The tribesmen, who were not hit, would instantly surrender and turn their diamonds over to the mercenaries. It was a “diamond war,” Kamil later explained in his account of these exploits.

As the risks of smuggling diamonds to Liberia greatly increased, and caravan after caravan was intercepted and plundered by mercenaries, the Lebanese dealers saw little alternative but to sell their contraband diamonds in Sierra Leone. This meant that the dealers had to pay a tax on the diamonds. The Sierra Leone government facilitated these transactions by lowering the export tax on diamonds.

Once the illicit diamonds had been contained in Sierra Leone, De Beers established a string of buying offices in the jungle. Each buying office was no more than a corrugated iron hut with a barred slit through which their agent did business with the pot-holers. Each agent was given a set of sample diamonds, with which he compared those diamonds offered for sale, and a strongbox full of Sierra Leonean currency. When he ran out of currency, he radioed the cartel’s office in Freetown, and a plane was sent out to drop another box of currency next to his trading post. De Beers sent some of its most promising recruits in London into the jungles of Sierra Leone to train as diamond buyers. In short order, the potholers became fully accustomed to dealing with these well tailored buyers in the strange huts.

By 1957, Sillitoe decided that he had successfully completed his mission for the cartel. He quietly disbanded his International Diamond Security Organization, though many of his agents and mercenaries continued working directly or indirectly for the cartel, and he returned to his chocolate shop in Eastbourne.

Sierra Leone, despite the counterintelligence successes of Sillitoe, again became in the late 1960s a serious threat to the De Beers monopoly. In 1968, to mute criticism about its dealings with the cartel, the government created a state owned diamond company called Dominico to which all the diamonds found in that country had to be sold. Dominico, in turn, sold half its diamonds to a London corporation which in turn sold these diamonds to De Beers’ Diamond Trading Company. The remaining half was in theory at least sold to three independent American dealers: Maurice Tempelsman, who received 27 percent, Lazare Kaplan, who received 3 percent, and Harry Winston, who received the other 20 percent. In reality, however, both Tempelsman and Kaplan resold their share to the Diamond Trading Company in London, which effectively gave the cartel control of 80 percent of the Sierra Leonean diamonds. Winston, who like Kaplan and Tempelsman was a major customer of the cartel was temporarily permitted to sell his share in New York.

As part of the window dressing for this deal, Tempelsman agreed to open a diamond-cutting factory in Sierra Leone’s capital of Freetown. These cut and polished diamonds would then be sold to tourists as Sierra Leonean gems. As it turned out, however, Sierra Leonean diamonds were too difficult to be cut by inexperienced labor, and De Beers, which was Tempelsman’s silent partner in the venture, therefore provided the factory with semi-finished diamonds from its London stockpile, which could be easily polished by Sierra Leonean labor. An Israeli cutter was brought in to supervise the diamond cutting, and a number of Sierra Leoneans were trained by him as polishers. The “factory” became a favored part of the official tours provided for important visitors to Sierra Leone. (Visitors who purchased “Sierra Leonean” diamonds from the factory or the retail stores in Freetown were, of course, not told the true origins of these diamonds.)

Even though the cartel and the Sierra Leone government were satisfied with this complicated arrangement for dividing the diamonds, a number of powerful Lebanese businessmen in Freetown believed that they were being unfairly cut out of the lucrative trade. They demanded a share of the diamonds but were turned down. The dispute came to a dramatic head on November 13, 1969, when a band of masked men with submachine guns brazenly held up the truck delivering the rich October shipment of diamonds to the sorting office in Freetown. The security officers from the mine put up no resistance, and the masked men walked off with the diamonds. A private plane at the airport then flew the cache of diamonds to Europe, where they were sold for an estimated $10 million to a consortium of diamond dealers.

In investigating this well-planned and professionally executed robbery, the cartel quickly established that the thieves had had inside information about the time and place of the delivery, and that the police had permitted them to escape from the country. The more they looked into the circumstances surrounding the crime, the more the cartel’s investigators found abundant evidence of corruption in high places. The coverup seemed to involve everyone from petty police officials to )Justices of the Supreme Court. From what the investigators could piece together from the cartel’s network of informers, it appeared that a group of Lebanese businessmen were behind the robbery. Further inquiries showed, however, that these Lebanese had powerful connections with the highest officials in the government and therefore there was virtually no possibility that any action would be taken against them.

Since De Beers could not easily eliminate the Lebanese from their positions of power in Sierra Leone, it decided to make a deal with some of them. The single most powerful Lebanese entrepreneur in Sierra Leone was Jamil Mohammed. He had an African mother and Lebanese father, and in the 1950s had been reputed to be the financier behind many of the gangs of illicit diamond diggers. In any case, he made an immense fortune in diamonds and invested it in real estate, rice and fishing. Then he became a partner with the Soviet Union in a lucrative venture that allowed their trawlers to fish in Sierra Leone’s waters and operate out of Sierra Leone’s ports. By 1969, he had become the richest man in Sierra Leone and more or less the godfather who looked after the interests of the Afro-Lebanese community. And he now became the man with whom the diamond cartel decided to deal directly in Sierra Leone.

Accordingly, the division of Sierra Leonean diamonds was suddenly revised in early 1970. The cartel would still receive, through its allies, 80 percent of the total production. The remaining 20 percent would, however, be taken away from Harry Winston, and most of this consignment would instead be given to Jamil Mohammed. Jamil Mohammed would then sell his share back to the cartel for a substantial profit. The net effect of this new arrangement was that the cartel received nearly 100 percent of Sierra Leone’s diamonds, and Jamil Mohammed, the cartel’s new man in Sierra Leone, received a fixed percentage of the revenue from these diamonds. There were no more robberies in Sierra Leone and a marked decrease in smuggling.

The only problem that the cartel had in Sierra Leone now was that the production was gradually decreasing. As the riverbeds and mudholes were exhaustively panned, fewer and fewer diamonds were found. By 1978, Jamil Mohammed, vexed by the decline in output, made new demands on the cartel. He asked for a larger share of all the giant diamonds found in Sierra Leone (some weighed more than a hundred carats). These giant diamonds still could be sold directly to dealers in Antwerp and New York at enormous profits. When the cartel refused to increase his share of these giant diamonds, Jamil Mohammed threatened to sell his share of diamonds on the open market. The cartel now began to regard Jamil Mohammed “as a monster of our creation,” as one of De Beers’ executives put it.

It was, however, necessary to come to terms with strong men like Jamil Mohammed in Africa to preserve the diamond invention. Eventually, his share was increased, and he was given access to the great diamonds.

The smuggling problem was not restricted to Sierra Leone. Sir Ernest Oppenheimer had always considered the vast undeveloped diamond fields of the Congo to be the single greatest threat to the cartel. So long as the Belgians ruled this area, he was able to assure, through secret arrangements with the Belgian government and banking houses, that diamond smugglers would be ruthlessly stamped out in the Congo. The situation changed radically for the cartel after Belgium abruptly granted the colony Independence in I 960 and it became the independent nation of Zaire. De Beers now had to persuade its President, Mobutu Sese Seko, that it also was in his interest to prevent diamonds from being smuggled out of the country. Working through intermediaries in the capital of Kinshasa, De Beers arranged a deal whereby Zaire would sell all its diamonds to a privately held corporation, which, in turn, would deliver these diamonds to De Beers Diamond Trading Company in London. The corporation would pay an immense tax to the Zairean government and distribute an important share of the profits in the diamonds to Zairean stockholders who were closely associated with the Mobutu government.

Consequently, Mobutu moved even more vigorously against the smugglers than his Belgian predecessor. He deployed hovercraft patrol ships, which could skim over the water at forty miles an hour, and armed helicopter gun ships to police the diamond fields. These diamond soldiers tended to shoot first and ask questions only afterward. For example, in November of 1979, they spotted a group of young Zaireans walking through a diamond digging, and ambushed them, killing some 200 of them in a matter of minutes. They then learned that they were students on a camping trip, not diamond poachers.

Mobutu also moved to prevent diamonds from being pilfered in the sorting houses in Zaire. Since native sorters could not be effectively isolated from their family and friends, and therefore they could easily pass along diamonds that they swallowed or palmed, Mobutu arranged with the Diamond Trading Company to employ European sorters rather than Zaireans. In a matter of months, the number of gem diamonds recovered-and turned in-in the Zairean sorting house increased by 30 percent.

Most of Angola’s diamonds were mined from meandering rivers in eastern Angola which allowed easy access to illegal diggers and smugglers. De Beers arranged for the rivers to be dammed and the riverbeds cordoned off behind barbwire. This prevented diamonds from being carried downstream. Then, to seal off the jungle border, De Beers arranged to hire the remnants of the Katanga gendarme, which had fled Zaire en masse after its rebellion against Mobutu had failed in the 1960s. Led by mercenaries, these soldiers tracked down smugglers in the anarchic border zone, and they received a bounty for the diamonds they recovered.

Even with the support of private armies and black governments, it was impossible for De Beers to eradicate completely native smugglers . To prevent even this trickle of gems from reaching Europe and competing with the cartel’s prices, De Beers stationed undercover diamond buyers in Monrovia, Brazzaville, Burundi and other entrepots in Africa. Aside from buying back diamonds, this operation was designed to provide a constant flow of information that could be used against the diamond smugglers. One of the men chosen to head this undercover diamond buying was the Lebanese mercenary who had ambushed hundreds of smugglers in Sierra Leone, Fred Kamil.

In April of 1965, Kamil was flown by De Beers to Johannesburg and then driven by a major in the South African police to Oppenheimer’s headquarters at 44 Main Street to meet Colonel George Cloete Visser, the head of security for the Anglo-American Corporation. According to Kamil’s account, an agreement was “hammered out” which included: “Kamil would establish a network of investigators and informers which would operate secretly and independently, but under the direction of Anglo-American Corporation’s Security.” The priorities were: “(a) The identity and activities of the Corporation’s employees in positions of trust, involved in illicit diamond buying. (b) The discovery and closure of diamond leakages from the Corporation’s mining and protected areas. (c) The recovery of stolen diamonds.”

As compensation, Kamil was to be paid his expenses plus one third of the value of all the diamonds that were recovered. It provided him with a powerful incentive to uncover stolen diamonds.

Kamil built a fairly extensive intelligence organization throughout southern Africa and made a small fortune recovering smuggled diamonds for the cartel. Then, in 1968, he began to suspect that some high-level De Beers executives were involved in siphoning off diamonds from the mines in Namibia. When he persisted in steering his investigation into this sensitive area, Colonel Visser abruptly terminated his arrangement with the cartel. Kamil suspected that he was fired because he was on the verge of exposing these executives.

Angry and embittered, Kamil returned to Beirut from where he wrote Harry Oppenheimer a series of letters demanding more compensation for his work. He received no response. Finally, in 1972, he devised a desperate plan to extort money from De Beers. He would hijack a South African airliner carrying Oppenheimer’s son-in-law, Gordon Waddell, and demand that Oppenheimer personally meet with him and negotiate the ransom. With a Lebanese companion named AM Yaghi and a few hand grenades, Kamil managed to hijack a South African airliner, but the intended victim was not aboard it. Oppenheimer refused to meet with him-or ransom the jet. Kamil finally ordered the pilot to land in Malawi, where army troops shot out the plane’s wheels. After a twenty-four-hour siege, Kamil surrendered.

Kamil served only a short time in prison in Malawi and was pardoned. Shortly thereafter, the Anglo-American Corporation paid him about $100,000 that was supposedly additional compensation for his past services. He came out of the diamond war a fairly rich mercenary.

Eventually, the diamond cartel established through a Swiss subsidiary the Outside Buying Office, or OBO, in Antwerp. Working at an arms-length distance, it provided funds to buying agents throughout West Africa to buy up or otherwise prevent gem diamonds from reaching diamond cutters.

In 1950, De Beers had a worldwide monopoly on the production of natural diamonds. It directly controlled all the pipe mines in the world– there were only seven, and they were all in southern and central Africa– and it had arrangements, either direct or surreptitious, with the governments of all the major diamond-producing countries to buy whatever diamonds were found in those regions by native diggers or fortune hunters. It also had the financial and political resources to preemptively buy out any new diamond discovery in most parts of the world.

There was, however, another threat to the diamond invention that emerged that year: the possibility that diamonds could be produced in a laboratory or even a factory. A team of scientists at the De Beers Research Laboratories had come to the conclusion that it was only a matter of time before a process was found for synthesizing diamonds. They had received information that both the United States and the Soviet Union were encouraging research aimed at mass producing industrial-grade diamonds. Converting carbon, which was one of the most common of all substances on earth, to diamonds was basically an engineering problem. It required constructing a vessel strong enough to withstand the heat and pressure necessary for inducing the synthesis. In a meeting with Sir Ernest Oppenheimer, they had themselves argued that advanced metallurgic alloys and high-pressure physics made the solution of this problem inevitable. They proposed that De Beers itself take the lead in developing this diamond-making technology, then through patents and licenses attempt to control synthetic diamond production. They warned that if an outside party made the breakthrough, De Beers might lose its monopoly position.

Sir Ernest had listened patiently to their arguments for a crash program on diamond synthesis. Then, after considering the matter, he turned them down, and said, “Only God can make a diamond.” His dogma notwithstanding, his scientific assessment of the situation proved wrong. Within two years, a diamond was produced in a laboratory in Sweden.

For at least 300 years scientists had experimented with the conversion of carbon to diamonds. For example, as early as 1694, Florentine academicians gathered around a terrace to witness the following experiment: A magnificently cut diamond was placed in a crucible under a powerful glass lens. As the sun’s rays focused on it, it began giving off acrid black vapors. A few minutes later, it disappeared in a cloud of smoke, leaving not a trace of diamond in the crucible. The academicians suggested that the diamond was pure carbon, and under the fiery heat it had turned to the gaseous form, carbon dioxide. But they could not prove this assertion.

A century later, an English chemist, Smithson Tennant, burned a diamond in a sealed vessel filled with pure oxygen. It also decomposed into an acrid vapor. Through chemical analysis, Tennant was able to determine that this vapor was carbon dioxide, and that the weight of the carbon in the vapor exactly matched the weight of that of the diamond that had vaporized. From this and other experiments, it was scientifically established that a diamond was carbon.

If diamonds could be transformed through a simple chemical reaction into carbon, it followed that carbon, through a reverse process, could be converted to diamonds. From the nineteenth century onward, the idea that the commonest of elements, carbon, could be turned into rare diamonds in the laboratory intrigued both scientists and confidence men and led to a wide range of experiments as well as dubious claims.

In 1880, a twenty-five-year-old Scottish chemist named James Ballantyne Hannay, working in a laboratory in Glasgow, attempted to achieve this sought-after synthesis by exploding carbonaceous material. He first sealed a mixture of powdered carbon, bone oil, and paraffin in coiled tubes, and then placed the tubes into a furnace. When the heat and pressure built up sufficiently, the tubes exploded and splattered the furnace walls with white-hot debris. After waiting for the furnace to cool, Hannay carefully scraped a number of minute particles off the sur~ace with a tweezers and found that these specks scratched glass-one test of a diamond. Triumphantly, Hannay claimed that he had manufactured diamonds and sent about a dozen specimens to the British Museum of Natural History in London.

At the time, however, most of Hannay’s contemporaries doubted that he had, in fact, achieved the synthesis of carbon to diamond crystals. Some scientists argued that he had mis-analyzed the crystals that had resulted from his experiments as diamonds, and others openly insinuated that Hannay had himself put the diamonds into the tubes to fraudulently create a reputation for himself. Since the crystals that Hannay claimed were produced through his process were too minute to be used in either jewelry or industrial tools, the issue of whether or not these were authentic diamonds remained a purely academic one. More than a half century later, however, Hannay’s crystals were rediscovered by the British Museum and, under X-ray analysis, proved to be diamonds of an extremely rare variety called “Type II.” The fact that Type II diamonds were not generally recovered from mines at the time of Hannay’s experiments indicated that he had indeed manufactured them.

Hannay was not the only experimenter in the nineteenth century who claimed success in synthesizing diamonds. In both Russia and France, scientists achieved similar results in the laboratory by applying heat and pressure to carbon. They were not able to persuade their peers, however, that the microscopic crystals their ingenious experiments yielded bore more than a passing resemblance to diamonds. The main effect of these early experiments was to induce an element of fear in the bankers who had invested heavily in natural diamonds. In 1905, for example, a self-styled French inventor named Henri Lemoine informed Sir Julius Wernher that he had discovered a process for mass-producing gem-sized diamonds from lumps of coal. Sir Julius, a British banker who was one of the four life governors of De Beers Consolidated Mines, feared that unless such an invention were brought under control it would wreck the diamond industry. Even the mere rumor of its existence could cause a selling panic among the investors in De Beers. Under these circumstances, he decided that there was only one prudent course of action: He would demand a demonstration, and if the invention worked, he would buy it-and then delay or suppress it.

Lemoine proved most cooperative. He agreed to sell the invention in exchange for a royalty and money to further develop it. He also invited Sir Julius to his laboratory in Paris to witness personally the synthesis of gem-sized diamonds.

Several weeks later, Sir Julius arrived at the Paris laboratory, which was located in the basement of an abandoned warehouse. He was accompanied by Francis Oats, the top executive at De Beers, and two other associates. Lemoine seated the group around a huge furnace and then left the room.

A few minutes later, the French inventor reappeared stark naked. He said that he had removed all his clothes so that they could see that he was concealing no diamonds. Then, like some medieval alchemist, he proceeded to pour various unidentified substances into a small crucible and mix them together. After displaying the mixture to the four gentlemen from London, he placed it in the furnace and threw a number of switches.

As the furnace blazed away, the naked inventor stood in front of it, and explained that the key to the synthesis was the secret formula of the ingredients in the crucible, which lie could not disclose. Then, after a quarter of an hour, he turned the switches off. Reaching into the furnace with a pair of tongs, he removed the white-hot crucible and placed it on a table in front of the men.

After it had cooled, he stirred the concoction with a pair of tweezers, and began plucking out from it well-formed though relatively small diamonds. In all, he produced some twenty gem diamonds, which he passed around for the group’s inspection.

Peering at them, one after another, through his jeweler’s loupe, Francis Oats found that they curiously resembled in color and shape the diamonds that were extracted from De Beers Jagersfontein mine in South Africa. Highly skeptical of the demonstration, Oats then demanded that Lemoine repeat the procedure.

Without any objections, Lemoine mixed another batch of ingredients in the crucible, and again cooked it for fifteen minutes in the furnace. This time he extracted from the smoldering brew thirty gem diamonds.

After examining this second batch of diamonds with their loupes, Sir Julius conferred with Oats in private. Oats suspected that the whole experiment was nothing more than a hoax. Sir Julius understood Oats’ doubts, but believed that there was still some chance that this French inventor had stumbled on the secret formula for diamonds. He therefore offered to advance Lemoine money to develop his invention on the condition that its existence remain secret.

Over the next three years, Sir Julius gave Lemoine 64,000 pounds sterling, an enormous sum of money. In return, Sir Julius received an option to buy the secret formula which had been deposited by Lemoine under seal in a London bank.

In 1908, however, a Persian jeweler admitted that he had sold Lemoine a supply of small, uncut diamonds from the Jagersfontein mine that exactly matched the description of the diamonds that had supposedly been manufactured in the furnace. Lemoine was then indicted and brought to trial for defrauding Sir Julius of 64,000 pounds sterling. Despite his continued protestation that his invention worked, Lemoine was unable to duplicate his experiment for the court, and when his secret formula was unsealed by court order it was no more than a mixture powdered with carbon and sugar. Before the court could pass judgment on him, Lemoine fled the country.

In 1948, Soviet scientists began to experiment with the concept of growing diamond crystals from “seeds,” just as rock candy crystals are grown from a single molecule of sugar. To accomplish this end, a minute fragment of diamond was bombarded by carbon iodine gas, and gradually, carbon molecules attached themselves to the structure of the diamond “seed,” thereby enlarging the crystal. These experiments were conducted at the time under a veil of complete secrecy.

Meanwhile, in Sweden, engineers at ASEA, an engineering company, focused their efforts on constructing a hydraulic press which could produce the enormous pressures necessary for the synthesis of diamonds. They used six cone-shaped pistons which, when they came together, formed a perfect sphere. Although the attempts to convert carbon in the form of graphite into diamonds in this press failed, the engineers succeeded, in 1953, in converting a mixture of iron and carbon into some forty diamond crystals. ASEA executives decided, however, to keep the results secret while they developed a more commercial process for directly converting graphite to diamonds.

The real engineering triumph came in the United States, however. In Schenectady, New York, a team of research scientists at the General Electric Company devised a hydraulic press which was far more powerful than the one in Sweden. It had the ability to generate pressures of more than a million pounds per square inch, and its tungsten carbide walls could contain temperatures of over 5000 degrees Fahrenheit. Equations worked out at Oxford by Sir Francis Simon and R. Berman had predicted that at these pressures and temperatures graphite would be directly converted into diamond crystals.

Then in 1954, the General Electric scientists began feeding graphite into the press. After enormous amounts of pressure were applied, they recovered minute diamonds-one millimeter in length. Under X-ray examination, it became clear that the amorphous carbon molecules in graphite, which resembled a hairnet, had been rearranged under the heat and pressure into a tetrahedron diamond structure. These were not false diamonds; they were the same as mined diamonds. The next problem for the General Electric scientists and engineers was to invent a commercial process through which these diamonds could be manufactured more cheaply than equivalent diamonds extracted from a mine. They began experimenting with different catalysts-nickel, iron, tantalum-which when placed in the press with the graphite would allow the reaction to take place faster and at less cost in terms of energy expended. By the end of the year, the engineers had designed a system of belts and presses that would continuously turn out diamonds at costs competitive with those of producing natural diamonds.

Up to this point, the General Electric experiments had been a closely guarded secret, but in February of 1955 General Electric decided to issue a press release outlining its achievements in diamond synthesis. Suddenly, the world knew that diamonds could be easily manufactured.

The shares of De Beers stock plummeted after the news of the General Electric invention. To be sure, General Electric’s diamonds were too small and discolored by the catalyst to be used as gems, but as General Electric spokesmen had pointed out, they were perfectly suitable for industrial purposes such as grinding and shaping tools. Since these “Industrial” diamonds had accounted for one-quarter of its total profit, De Beers faced potentially disastrous competition from this American industrial giant. Even though General Electric had not yet claimed the capacity to synthesize larger and better quality diamonds, many investors feared they soon would.

De Beers outwardly attempted to maintain a facade of world patents before the South Africans did. In mid-September, the Administration acceded to this urgent request, and General Electric took out the patents on its technology for synthesizing diamonds. The science of diamond-making was no longer secret.

De Beers, even though it was five years behind General Electric in perfecting the commercial manufacturing process for diamonds, was not yet defeated. It still possessed a worldwide marketing network for industrial diamonds and vast financial resources. After first attempting to litigate the patent rights, De Beers finally agreed to pay General Electric some $8 million plus royalties for the right to manufacture diamonds under the process invented by General Electric. It then entered into a series of cross-licensing agreements with General Electric which made it difficult, if not impossible, for other companies to compete in synthetic diamonds. To further enhance its position, Harry Oppenheimer arranged to buy the Swedish factory from ASEA, as well as all its patents and technology. By 1961, in addition to the Swedish presses, De Beers had seventy-five hydraulic presses in operation in South Africa squeezing out diamonds, and then it opened another factory in Shannon, Ireland. De Beers called its synthetic diamond division Ultra High Pressure Units, Inc.

While De Beers and General Electric were dividing up the markets in the Western world, the Soviet Union created its own massive synthetic diamond industry in Kiev. The Soviets used the basic General Electric process, but they built the hydraulic presses on a much larger scale. As a result, the Soviets had a capacity to manufacture over 10 million carats of diamonds a year.

By the mid-1960s, the diamonds pouring out of synthetic presses in South Africa, the United States and the Soviet Union were measured not in carats or ounces but in tons. Initially, man-made diamonds were not larger than bits of sand and were used almost exclusively as abrasive grit for grinding wheels and diamond saws. Gradually, however, techniques were developed for bonding the minute crystals of diamonds together into larger units that were used for a large range of industrial purposes. Indeed, except for drilling bits and wire-drawing dies, which still required natural diamonds, synthetic diamonds were adapted for most industrial purposes.

Again the diamond invention was threatened. In October of 1966, Harry Oppenheimer flew to New York where he met with William Courdier, the General Electric executive in charge of synthetic diamond production, and other senior General Electric executives. Because of American antitrust laws, however, General Electric refused to go along with any strategy for coordination or controlling of synthetic diamonds. De Beers had to find new means of protecting its invention.

By 1970, more than half the diamonds produced in the world were man-made. Unlike prices for gem diamonds, which rose steadily during the postwar period, the prices of industrial diamonds dropped sharply. If it were not for the fact that the world’s consumption of industrial diamonds had actually quadrupled between 1955 and 1970, and a host of new uses had been found for diamond abrasives, natural diamonds would no doubt have been wholly replaced by synthetic ones. Even with this vast expansion of the market for industrial diamonds, the price fell to less than 50 cents a carat for diamond abrasives.

Furthermore, in the midst of this heated competition, Dr. Bernard Senior, one of the four scientists who achieved the diamond synthesis for De Beers, resigned from De Beers laboratory with the intention of going into the diamond-making business himself. Since his employment agreement prevented him from competing with De Beers in South Africa, Dr. Senior moved to the island of Mauritius and established there the Southern Cross Diamond Company for the purpose of manufacturing diamonds. In response to this new threat, De Beers quickly moved to impound Dr. Senior’s bank accounts in South Africa, and placed great, and in some cases irresistible, pressure on companies in South Africa not to ship Dr. Senior the supplies he needed for his factory. In addition, it filed a large number of legal actions designed to harass Senior’s company. Eventually, because of such actions, the Southern Cross Company ceased to be a serious threat to De Beers.

There was, however, further disturbing news from America. General Electric announced in May 1970 that its scientists had accomplished De Beer’s worst nightmare. They had synthesized gem-quality diamonds that weighed over one carat. Even the scientists conducting the experiment were surprised by the incredible results. The synthesis required, it was explained, two distinct phases. First, graphite was converted in an ordinary hydraulic press to diamond crystals no larger than a grain of sand and weighing only 1500th of a carat. Then, in the second stage of the process, these crystals were put at either end of a metal tube which also contained a carbonaceous solution. The tube was left in a specially constructed hydraulic press that could maintain enormous heat and pressure for as long as a week. Under these conditions, the carbonaceous solution became unstable and released carbon atoms, which would eventually move to the cooler ends of the tube and attach themselves around the diamond “seed.” Gradually, the crystals would begin to grow in size. After 167 hours, when the press was opened, there were blue-white diamonds of gem quality that weighed between .60 and 1.1 carats. Presumably, if the press had been kept closed longer, the crystals would have grown even larger. The General Electric vice-president for research and development summed up the achievement as a “goal that has tantalized and frustrated scientists for nearly two centuries. . . . This comes very close to fulfilling the dreams of alchemists.”

Under closer scrutiny, it was found that the General Electric diamonds were not of perfect quality, but they were equal, if not superior, to most commercial-grade gems. After they were cut and polished, these man-made diamonds could not be differentiated from natural diamonds by the naked eye. In fact, even an expert, using a jeweler’s loupe, could not discern any difference. (The only telltale difference between the General Electric diamonds and natural ones was that the former tended to phosphoresce under an ultraviolet lamp, whereas the latter tended not to.)

De Beers reacted to the synthesis of gem diamonds in the same calm tone in which it had reacted fifteen years earlier to the synthesis of industrial diamonds. It claimed that it had known for “several years” that gem-sized diamonds could be created under laboratory conditions, but that since the cost of production would be “many times greater than finding and obtaining the natural product,” it was convinced that such a synthesis would prove to be “economically impractical.” Publicly, De Beers insisted that it would not alter its “plans for the future.”

General Electric also attempted to reassure American diamond dealers that General Electric was not about to flood the market with synthetic gem diamonds. Its spokesman told dealers: “Keep your diamonds. . . . We are not competing. We have no reason to harm the diamond industry.”

Despite these disclaimers, General Electric had evaluated the feasibility of manufacturing gem diamonds. It eventually decided against it for two reasons. First, there was a problem of what economists call “opportunity costs.” Manufacturing gem diamonds required tying up the press for nearly a week. In that same period, the presses could produce batches of powdered diamonds for industrial purposes every three minutes. Even though diamond powder could be sold for roughly only one percent what gem diamonds could be sold for, it would still be far more profitable to use the press for powder rather than gems.

To be sure, General Electric recognized that it would be possible to develop catalysts that would accelerate the time needed to produce gems and to engineer more efficient presses that would allow more diamonds to be grown in the same cycle. However, even if it were possible to mass-produce gem diamonds at costs comparable to those of industrial diamonds, there would be a more serious problem. If the public realized that diamonds could be manufactured in unlimited quantities in a factory, the entire market for diamonds might suddenly collapse. A senior General Electric executive who was involved in the decision not to manufacture gem diamonds explained to me, “We would be destroyed by the success of our own invention. The more diamonds that we made, the cheaper they would become. Then the mystique would be gone, and the price would drop to next to nothing.” General Electric decided not to invest hundreds of millions of dollars in presses to produce gem diamonds. Although their chief rivals had decided not to go ahead with manufacturing, it now became a war against time for the De Beers cartel. The science and technology that made it possible to manufacture real diamonds threatened to create a supply of diamonds that was beyond the control of De Beers.

The diamond invention, which had given value to diamonds for more than a half century, could survive only as long as this new invention, diamond synthesis, did not become commercially feasible. De Beers thus set out to retard it through secret agreements and financial interventions.

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’ diamonds flowed from the cutting centers in Europe to the main retail markets in America and Japan. This pipeline, as every dealer knows, is a crucial component in the diamond invention 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 connected through family ties or longstanding business relationships. New York City’s diamond district, where nearly half of all the gem diamonds in the world are bought or sold, is a key juncture in the pipeline.

The diamond district is located mainly in a single block on 47th Street between Fifth and Sixth Avenues. If one walks along the street level, he sees mainly retail stores with such enticing advertisements as, “We Buy Retail; Sell Wholesale.” These stores are meant mainly for tourists. The real diamond exchange, involving the sale of billions of dollars worth of loose diamonds, takes place in “clubs” and offices discreetly located on the upper floors of these buildings. Most of the smaller dealers are members of the Diamond Dealers Club, at 30 West 47th Street. Although the name evokes images of a plush and luxurious meeting place, the Diamond Dealers Club more closely resembles a tawdry cafeteria, with its linoleum floor and rows of bare tables. The 2,000-odd members, many of whom are Hasidic Jews, sit across the tables from one another like players at a chess tournament, their gaze fixed on an assemblage of tiny diamonds spread out on a piece of paper in between them. Every few moments a diamond sale is made, the diamonds on the table are sealed in the paper. In the center of the room there is a glass booth where diamonds are officially weighed after the transaction is agreed upon. Meanwhile, a loudspeaker system pages members to the telephone where they conduct further business. (Most of the members have no other office than the “club.”) The club also provides a room for the afternoon prayer and a kosher restaurant.

The larger dealers do their business not in the trading hall of the diamond club but in their own well-protected offices. Almost all these offices have closed-circuit television cameras to identify visitors, and at least three sets of locked doors through which the visitor must pass. The rule in the diamond district is that no stranger is ever admitted to these private offices. Since dealers commonly carry on their persons millions of dollars worth of diamonds, such stringent precautions are an indispensable part of the profession. The New York dealers are dependent on the flow of diamonds from London to the diamond-cutting factories in Tel Aviv. In the nineteen-seventies, however, a crimp emerged in the pipeline when Israeli diamond dealers, rather than processing and passing the diamonds on to New York, stockpiled them. Since diamond prices were then rapidly increasing at the time, and Israeli currency depreciating by more than 50 percent a year, it became more profitable for Israeli dealers to retain the diamonds that they received from London than to cut and sell them for paper money. These Israeli dealers, moreover, could borrow money from the banks on their diamonds at relatively low interest rates. As more and more diamonds were taken out of circulation at the Tel Aviv end of the pipeline, an acute shortage began in New York, driving prices up. By 1979, these Israeli stockpiles began indeed to threaten the entire diamond invention.

Until the Second World War, the diamond invention rested on three legs: production, centered in Africa; distribution, based in London; and diamond cutting, located almost exclusively in Antwerp. The German invasion of Belgium, however, knocked out one of the legs of the tripod-Antwerp. Oppenheimer had provided the Belgian cutting factories there with the lion’s share of De Beers diamonds, and he could count on them not to resell the diamonds to speculators or other “weak hands.” But with the fall of Antwerp, the diamond-cutting industry left De Beers’ universe of control.

Since many of the cutters in Antwerp were Jewish, the British-mandated territory of Palestine (Israel) became a natural focal point for the displaced industry. The birth of this new Israeli industry began in 1939 when two Jewish refugees in tattered clothes arrived at the port of Haifa in Palestine. When the customs officer on duty searched through their meager personal belongings, he discovered an envelope containing what looked like hundreds of tiny bits of broken milk glass. He puzzled over them for a moment, and then questioned the refugees about these odd fragments.

The refugees nervously explained that they were both diamond cutters from Antwerp, and the objects in the envelope were, in fact, rough diamonds which they hoped to cut and polish in Palestine. To do this, they told the customs officer they would need a small loan to set up a rudimentary work shop. Did the officer know anyone who might help them, they asked.

The customs officer had never before seen an uncut diamond; indeed, few people in Palestine in 1939 had ever seen one. He therefore took the packet of diamonds to Oved Ben Ami, the mayor of neighboring Natanya. Ben Ami, a short, sprightly man in his early thirties, was one of the most enterprising of the Jewish pioneers in Palestine. A decade earlier, Natanya was nothing but a marsh between Tel Aviv and Haifa, but Ben Ami, fearing that the Arabs might settle there and drive a wedge between the two Jewish cities, decided to found a Jewish settlement there. He put all his energy into raising money and recruiting settlers, and by 1939 he had succeeded in building a small city. It had, however, no industry. On seeing the diamonds, Ben Ami became interested in the possibility of establishing a diamond industry in his town of Natanya, and he asked to see the refugees.

The two men explained to Ben Ann that very little capital was necessary for cutting and polishing diamonds. All that was needed, in fact, was good sunlight, skilled labor, a few rudimentary tools and a supply of rough diamonds. They even demonstrated how a rough diamond was first cleaved, then cut and polished.

Ben Ami was impressed. He provided the men with a building in Natanya for their work and reached into his own pocket and lent them money for their personal expenses. He then did some further research into the diamond business.

Three requisites, sunlight, labor and tools, would be readily available in Palestine; the problem would be acquiring a steady supply of rough diamonds. He consulted a knowledgeable banker in Tel Aviv, and he found out that De Beers controlled virtually the entire world’s supply of diamonds. Since the cartel had an agreement with the government of Belgium, which specified that most of the diamonds would be sent to Antwerp to be cut by Belgian labor, this banker advised him that there was little possibility that the cartel would ever allow Palestine to compete with Belgium.

Although discouraged, Ben Ami refused to give up. He had determined that most of the world’s diamond business, including the De Beers cartel, was, as he put it, “in Jewish hands,” and he persuaded himself that most of these Jews would be sympathetic to the idea of creating a diamond industry in Palestine. He also realized that the Nazi armies were on the verge of overrunning Belgium and the Netherlands, and that many of the Jewish cutters, like the two refugees, might seek refuge in Palestine. He therefore dashed off a series of letters to the mayors of Antwerp and Amsterdam, as well as a number of guild officials in those cities, suggesting that they consider sending their Jewish cutters to Natanya for the duration of the war. He received, however, no reply until mid- 1940.

Ben Ami finally received a letter from a Jewish industrialist in Antwerp. The industrialist, who had obtained Ben Ami’s address from the mayor of Antwerp, offered to pay for the relocation of sixty Belgian diamond cutters in Palestine, Ben Ami could arrange the necessary entrance visas.

Since the British authorities had placed strict restrictions on the number of Jews allowed to enter Palestine, Ben Ami’s first task was to persuade the British to waive these quotas on immigrants. He asked Ben-Gurion, then head of the Jewish Agency, for help. Ben-Gurion’s first priority was saving Jews from the nations that had already been overrun by the Germans, and not from neutral countries such as Belgium.

Ben Ami went to the British high commissioner for Palestine. In presenting his case, he argued that since most of the diamonds in the world came from the British Empire, it was in the national interest of Great Britain to make sure that the skilled diamond cutters in Europe were not all captured by the Germans. As there was a distinct possibility that Germany would invade Belgium and Holland in the months ahead, he proposed that the British facilitate the immediate transfer of sixty diamond cutters to Palestine.

After studying the memorandum that Ben Ami had prepared on the subject, the high commissioner agreed that some precautions should be taken to protect the diamond trade. Cutting the tangle of red tape surrounding Jewish immigration to Palestine, he issued Ben Ami sixty visas for Belgian cutters.

The next problem for Ben Ami was persuading De Beers to send a supply of diamonds to Palestine. In London, he consulted Harry Abrams, the managing director of De Beers’ Diamond Trading Corporation. Ben Ami made the case that De Beers was about to lose its cutting centers in Antwerp and Amsterdam and it should look to Palestine as an alternative. Abrams coldly replied, “Don’t worry about us, Mr. Ben Ami. We have enough cut diamonds in our vault to last through the war … and then some.” Moreover, Abrams explained that De Beers had a binding agreement with the Belgian Government that prevented De Beers from sending diamonds to be cut anywhere else. Diamonds for Palestine were simply “out of the question.”

Ben Ami was not so easily put off. He sought out the assistance of Otto Oppenheimer, the brother of Sir Ernest, and appealed to him as a Jew to assist not merely the diamond industry but Palestine. Although Oppenheimer thought Ben Ami presumptuous, he finally wearily gave in and told Ben Ami, “I will be your ambassador and try to persuade De Beers.”

In fact, Oppenheimer was concerned that Ben Ami was stirring up the Colonial Office about the possible disruption of the diamond trade, and if he persisted, the British government might begin to scrutinize more closely the flow of diamonds around the world. To get rid of this persistent nuisance, Oppenheimer decided with Abrams to provide Ben Ami temporarily with a modest supply of diamonds that could be cut in Palestine.

Ben Ami then flew to Antwerp to recruit the sixty cutters. Even though war with Germany seemed imminent, he found it impossible to persuade the Jewish cutters to go to Palestine. They believed that the Germans, led by General Rommel, were on the verge of capturing Palestine, and they had no intention of leaving neutral Belgium. They were living in “a paradise of fools,” he concluded, and in the end, he managed to recruit only a half dozen cutters.

Ben Ami returned to Natanya considering his mission a failure. He had neither the master cutters nor the amount of diamonds he had hoped to obtain. However, within a week of his return, the Nazi armies blitzkrieged their way through the Low Countries. The British dispatched a destroyer to Antwerp in an attempt to seize the cutters’ stocks of diamonds before they fell into German hands, and a few of the Jewish cutters escaped with the British raiding party. But the cutting centers of Antwerp and Amsterdam were lost to the Allies-and De Beers-and Palestine now became an expedient alternative

In early 1941, Ben Ami received a message from George Prins, the broker who represented De Beers, saying that a consignment of diamonds had been allotted to Palestine. Before Ben Ami could receive them, however, he would have to pay ten thousand pounds sterling, which was the value De Beers established for them. Even though this was an enormous sum of money in Palestine in 1941, Ben Ami managed to convince a leading bank to advance it to him for the diamonds, which would serve as collateral. When the diamonds finally arrived in a small cardboard box, Ben Ami distributed them to the few trained diamond cutters. The diamonds themselves were relatively small stones, all less than a carat in weight, even in their uncut state. These melees, or medium-grade diamonds, required an enormous amount of labor to cut and finish, and had never been highly profitable goods in Antwerp or Amsterdam.

With a flow of Jewish refugees from Europe, Palestine had, however, an abundance of cheap labor. The diamond-cutting factories in Israel were organized along very different lines than those in Antwerp. Instead of assigning the task of cutting and polishing a. diamond to a single master craftsman, it was divided among six men. This division of labor, called the “chain of six,” made it far easier to train and employ diamond cutters and shortened the time involved in finishing the diamonds. Even though the process resulted in slightly inferior workmanship, the difference, especially on the medium-grade diamonds, was not noticeable to the naked eye.

By the end of the war, Palestine had suddenly become the world’s largest manufacturing center for diamonds, in terms of quantity, if not quality. During the war years, no less than 5,000 refugees had been trained as cutters, and De Beers had shipped more than $100 million worth of diamonds to Palestine. The rise of this Palestinian industry caused considerable concern in the more traditional cutting centers in Belgium.

After consulting the leading bankers and politicians in Belgium, De Beers decided that the only prudent policy for the cartel was to reestablish Antwerp as the world’s manufacturing center. Antwerp was, after all, less than an hour’s flight from London, and the dealers there had a long history of collaboration with the cartel. And Belgian interests still controlled the important mines in the Congo. Between 1945 and 1948, De Beers reduced the number of diamonds consigned to Palestine by as much as 70 percent. Moreover, the diamonds it continued to supply were smaller and of inferior quality to the medium-grade diamonds Palestine factories had received during the war. These sharp cutbacks had the intended effect of choking off the nascent industry.

In 1948, however, the Jewish state of Israel was established in Palestine. The new nation had only one viable industry-diamond manufacturing; and both the government and the Israeli banks decided that, despite the shortage of diamonds, that industry had to be aggressively supported. The major banks therefore extended virtually unlimited credit to diamond dealers to buy diamonds from the Belgian clients of De Beers. Since the Belgians preferred to manufacture the larger and more profitable stones, they were quite willing to make an instant profit on the smaller and less profitable stones in their consignments. The Israeli manufacturers made up for the higher prices that they paid for the diamonds by using cheaper labor. By the mid-1950s, Israeli manufacturers again dominated the melee, or small diamond, business-even though they had to buy most of their rough goods on the secondary market. The cartel quickly adjusted to the reality of the situation. Since Israeli manufacturers were determined to get diamonds by one means or another, De Beers decided that it, rather than the Belgian manufacturers, should realize the profits on the Israeli transactions. In an abrupt reversal of policy, De Beers began to supply a number of carefully chosen dealers in Israel with an abundance of melee diamonds. One dealer, Joseph Goldfinger, the cartel’s favored instrument in Israel, would be sent more than a hundred million dollars worth of small diamonds a year. De Beers also created its own subsidiary in Israel, Diamondel, to deal in rough diamonds. By 1965, Israel was receiving more than five-sixths of De Beers’ total allotment of melee diamonds.

In the 1970s, repeated devaluations of Israel’s currency gave the Israeli diamond-cutting industry a competitive edge over its rivals in Antwerp and New York. Not only were the Israeli factories more efficiently organized to cut small diamonds but because of their devalued money, they also had vastly lower labor costs than the factories elsewhere. Not satisfied with dominating the melee diamond business, Israeli dealers began to bid for the larger stones. By 1975, diamonds accounted for nearly 40 percent of Israel’s nonagricultural exports, and nearly 20,000 workers were employed in the cutting factories. In Antwerp, by contrast, over one-fourth of all the diamond cutters were out of work, and hundreds of factories, unable to cope with the Israeli competition, faced bankruptcy.

De Beers became seriously concerned that the Israeli competition could disrupt the entire diamond trade. In early 1977, Sir Philip Oppenheimer dispatched his son Anthony to Tel Aviv, accompanied by other De Beers executives. Anthony Oppenheimer’s mission was to persuade the Israelis to curtail their expansion. He met with De Beers’ favored clients, the bankers who were extending credit to diamond dealers and the government officials who supposedly regulated the Israeli industry. He subtly warned them all that De Beers would not tolerate unbridled competition between Israel and Antwerp, and announced that De Beers intended to cut the Israeli quota of diamonds by at least 20 percent in the coming year.

This warning had the opposite effect of what had been intended. Rather than paring down production in line with this quota, Israeli manufacturers and dealers began building up their own stockpile of diamonds. They paid a premium of one hundred percent or more for the unopened boxes of diamonds that De Beers had shipped to Belgian and American dealers. (And 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, which was then the center for the sale of smuggled goods, became a sort of extension of the Israeli bourse. After the Israeli dealers had purchased the diamonds, either from De Beers’ clients or smugglers, they received 80 percent of the amount they paid from Israeli banks in the form of a loan. 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 15 percent of the entire gross national product of Israel. The only collateral the banks had for these loans were uncut diamonds.

De Beers estimated the Israeli stockpile to be more than 6 million carats in 1977 and growing at a rate of almost a half million carats a month. At that rate, it would be only a matter of months before the Israeli stockpile would exceed that of 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 pour these diamonds onto the world market, destroying forever the carefully nurtured mystique of the value of diamonds. The cartel decided that they had no alternative but to force liquidation of the Israeli stockpile.

By 1977, however, the situation in Israel was almost completely out of De Beers’ control. The Goldfinger organization, and other of De Beers’ leading distributors in Israel, told De Beers that even if they cut back on their purchases, independent dealers and speculators would step in to take up the slack. The distributors warned the cartel that as long as the banks were willing to finance diamond purchases with artificially low interest rates, there would be no effective way of stopping Israelis from accumulating diamonds as a hedge against inflation. If it wanted to bring the diamond speculation under control, De Beers would have to clamp down on the banks.

De Beers was not without influence in Israeli banking circles. Harry Oppenheimer sat on the board of directors of Barclays International Bank, which controlled Barclays Discount Bank in Israel. And E. J. G. Dawes, one of the managing directors of the De Beers operation in London, was on the board of directors of the Union Bank of Israel, which together with Barclays Discount Bank financed more than half of all the Israeli diamond purchases. De Beers made it clear to the Israeli bankers that it considered the present speculation to be extremely dangerous. Moreover, it warned that it was adopting a new strategy of imposing “surcharges” on diamonds, which might be abruptly withdrawn at any moment. Since these “surcharges,” which would range as high as 40 percent of the value of the diamonds, were effectively a temporary price increase, they could be extremely risky to banks extending credit to diamond dealers. For example, with a 40 percent surcharge, a diamond dealer had to pay $1,400 rather than $1,000 for a small lot of diamonds; however, if the surcharge was then withdrawn, the diamonds would be worth only a thousand dollars. Through this device, De Beers, in effect, announced that it was embarking on a policy of manipulating the prices of diamonds in order to trap speculators. Under these circumstances, the Israeli banks could not afford to advance 80 percent of the purchase price, including the so-called surcharge. They therefore required additional collateral from the dealers and speculators. Further, they began, under pressure from De Beers, to raise interest rates on outstanding loans.

Within a matter of weeks in 1977, interest rates on diamonds went up 50th percent. Moreover, instead of lending money based on what Israeli dealers paid for diamonds, the banks now would only lend money based 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 in 1977-he would have to finance the increment from his personal 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. This dramatic reprisal made De Beers’ 250 or so remaining clients aware of the risks involved in trafficking with Israel.

As Israeli dealers found it increasingly difficult either to buy or finance diamonds, they were forced to sell diamonds from the stockpiles that they had accumulated. As Israeli diamonds poured onto the market in 1979, prices began to fall at the wholesale level. This decline led the Israeli banks to put further pressure on dealers to liquidate their stocks to repay their loans. Speculators found themselves caught between rising financing charges and lower prices, and in a state approaching panic, began selling their diamonds regardless of the price they had paid. Hundreds of Israeli dealers, unable to meet their commitments, went bankrupt in the fall of 1980 as prices continued to plunge. The banks inherited the diamonds. De Beers had won the first round in the diamond war with Israel.

CHAPTER SEVENTEEN
THE RUSSIANS ARE COMING

The most ominous threat to the stability of the diamond invention, however, came from the Russians. For the Soviet Union, diamonds in the postwar years were a strategic objective of the highest priority. When the Cold War began in 1947, the Soviet Union had no secure source of industrial diamonds. It was entirely dependent on the De Beers cartel for the diamond drilling stones it needed in order to explore for oil and gas, the diamond die stones it needed to produce precision parts and draw out fine wire, and the diamond abrasives it needed to grind machine tools and armaments. Without a continuous supply of these industrial diamonds, it would be impossible for it to rebuild its war-wrecked economy-or to effectively rearm its military machine. Stalin, fully realizing that his crucial supply of diamonds could be cut off at any moment by an embargo, demanded that Russian geologists and scientists develop a more dependable source of diamonds. Since no diamond mines had ever been found in the Soviet Union, there were only two possible ways of satisfying Stalin’s order: either pipe mines had to be uncovered in the unexplored regions of the Soviet Union through a vast program of systematic prospecting, or industrial diamonds had to be manufactured through a laboratory procedure. The search for diamonds focused on the Siberian plateau in Yakutia province that lay between the Lena and Yenisei rivers, which Russian geologists concluded resembled geologically the “shield” of South Africa. Both formations had remained stable for cons of geological time, and neither had been deformed or “folded” by convolutions of the earth. Since kimberlite pipes had been found on the South African shield Russian geologists theorized that they might also exist in this Yakutian shield. The first party of diamond prospectors flew into Yakutia in late 1947. The expedition was ill-prepared for the punishing environment, however, and after suffering astounding privations on the tundra, it had to be abandoned. Moscow ordered the search to be continued, regardless of cost, and the following spring more geologists were flown into the wastelands of Yakutia. They were better equipped, with X-ray diamond detectors and other sophisticated prospecting gear, and they found a few microscopic diamond traces-but no pipe. Finally, in 1953, a young Russian geologist named Larissa Popugaieva, working in her laboratory in Leningrad, noticed that the prospecting samples from Yakutia contained an increasing percentage of tiny blood-red garnets called pyropes. Since she knew such garnets had been found in kimberlite ore formations in southern Africa, she proposed that prospectors, rather than searching for diamonds, follow the trail of the garnets. She then joined the diamond-hunting expedition in Yakutia, and intrepidly tracking the garnets, managed to find their source near the Vilyul River Basin within a matter of months. It was a volcanic pipe mine she named “Thunder Flash.” Unfortunately, however, the proportion of diamonds in the ore in Thunder Flash was not high enough for feasible production. Dozens of geologists, all looking for traces of blood-red garnets, then began scrutinizing the banks of the Vilyul River for more volcanic pipes (which the Russians call trubkas). In the spring, of 1955, another young geologist, Yuri Khabardin, came across a fox’s hole in a ravine with blue earth. He found that it had high diamond content, and excitedly began sending a message over his shortwave radio. It said cryptically, “I am smoking the pipe of peace.” In Moscow, the prearranged code was immediately understood to mean that the geologist had discovered and tested a kimberlite pipe. The volcanic pipe that Khabardin discovered was called appropriately the Mirny, or Peace, pipe. The blue ground at the mouth of the pipe was slightly more than a half mile wide, and covered some seventeen acres. Compared to kimberlite pipes in southern Africa, the Mirny was not an immense pipe. (It was less than one-quarter of the size of the Premier mine in South Africa.) But Soviet planners in Moscow ordered a crash program for getting diamonds out of it. Before the Mirny pipe could begin producing diamonds, engineers in Siberia had to find ways of overcoming the incredibly harsh conditions at the mine site. During the seven month-long winter in Yakutia, they found that steel tools became so brittle that they broke like match sticks, oil froze into solid blocks, and rubber tires shattered like fragile crockery in the sub-zero temperatures. Moreover, when the summer came, the top layer of permafrost melted into a swamp of uncontrollable mud. Despite these natural impediments, engineers turned Mirny into an open-pit mine. Jet engines were used to blast holes in the permafrost, and enormous charges of dynamite were used to excavate the surface rock and loosen the underlying kimberlite ore. The entire mine had to be covered at night to prevent the machinery from freezing. By 1960, huge steam shovels were loading the ore into trucks, which had to transport it some twenty miles to a separation plant (the permafrost at the site of the mine could not hold the weight of the plant). More pipes were later discovered on the very edge of the Arctic circle. To service these mines in the “pole of cold,” as this region is called by the Russians, the Russians erected an entirely new city, Aikhal. According to the descriptions in Russian periodicals, Aikhal stands, like some giant centipede, on ten-foot-high steel legs. Each of these steel legs is Imbedded into the permafrost to prevent the city from sinking into a quagmire of mud during the summer thaw. Even in winter, when the temperature falls to 80 degrees below zero, giant pumps cool the air beneath the buildings to prevent the heat of the buildings from causing any melting in the permafrost. All the buildings are interconnected by elevated passageways and wrapped in a heavy shroud of translucent plastic. Aikhal is, as one journal puts it, “a completely enclosed working environment.” This herculean effort had a single purpose: the production of diamonds. Just as diamonds began to flow out of Siberia, Russian scientists in a laboratory in Kiev reported that they had found a commercial process for synthesizing minute diamonds that could be used as abrasive grit. The process, though similar to the one that General Electric had developed in the United States, was based on Russian research in high-pressure physics. In the Siberian diamond mine, the gem diamonds, which had first been mined as a by-product of industrial diamonds, could now be sold abroad. In early 1962, the Soviet Union agreed to sell virtually all of its uncut gem diamonds to De Beers. Within a few years, diamond production was nearly ten million carats a year, and the Soviet Union exported some two million carats as gems. Diamonds became the leading Soviet cash export to the West. In 1968, Viktor 1. Tikhonov, the head of the Mirny Diamond Administration, said, “We call ourselves the country’s foreign exchange department.” Meanwhile, in London, De Beers’ executives were mystified by the progressively larger shipments of Russian diamonds that they were receiving each year. In many ways, the Russian outpouring of diamonds involved a number of enigmas that could not be easily resolved on the basis of the available facts. First of all, the enormous production of diamonds from Mirny did not seem consistent with the relatively small size of the pipe mine. Specifically, De Beers’ geologists questioned how this Siberian pipe mine could produce five times the number of diamonds that comparable South African mines produced. For example, in 1978, the Finsch mine, which went into production in South Africa at about the same time as did the Mirny mine in Siberia, produced some two million carats of diamonds. That same year Mirny produced well over ten million carats of diamonds. Moreover, the Finsch pipe covered an area more than twice the size of Mirny, and it seemed unlikely to them that Mirny was yielding more than ten times the number of diamonds per surface acre as its South African counterpart. This disparity became even more puzzling when the different mining conditions in South Africa and Siberia were taken into account. The Finsch mine, which processes some 10,000 tons a day, 365 days a year, operated in an ideal arid climate. The machinery at the Mirny mine, on the other hand, must excavate ground that Is frozen solid seven months of the year in sub-freezing blizzards. Under these conditions, it seemed difficult to accept that the Russians could be excavating the tonnage necessary to produce ten million carats from a single pipe. Russian geologists, when asked about this mysterious production from Mirny, initially suggested that the Siberian ore had an extraordinarily high grade of four carats a ton. This number greatly exceeded any grade of ore in the history of diamond mining in South Africa. Indeed, the Finsch mine, which had the richest grade of any De Beers mine, was yielding only about .8 carats a ton. The Russian technical journals further confused the issue by reporting that the grade of Mirny ore was not actually consistently high, and that at times it was as low as .05 carats a ton (which was inferior to any South African ore). The enigma of Mirny’s overproduction, therefore, was not satisfactorily resolved. The constantly accelerating production from Mirny in the early 1970s was another aspect of the mystery. Diamond pipes are shaped roughly like funnels, with the ore body tapering off below the surface of the earth. This means that in pipe mines the amount of ore excavated declines at deeper depths. In South Africa, after a few years of initially high production, all the pipe mines enter a phase of gradual decline. In Mirny, however, after ten years of intensive excavations, the production of diamonds, instead of leveling off, accelerated. To be sure, part of these diamonds might have actually come from other Siberian mines, such as the Aikhal pipe and the Udachnaya pipe, which went into limited production. The sheer magnitude of the increased production, which went from io million carats in 1970 to 16 million carats in 1975, continued, however, to baffle De Beers analysts in London. Each year they predicted that Siberian shipments would decrease, but each year, despite the calculus of diminishing returns in diamond mining, the Russian consignments to London continued to increase. There was an equally inexplicable pattern during these years surrounding Soviet purchases of industrial diamonds in Europe from De Beers and its clients. Diamonds in a pipe occur in a wide spectrum of sizes, shapes and different qualities. Usually, a small proportion are sorted out for gems; a larger proportion of the twisted, deformed, and discolored diamonds are sorted out for drilling stones, dies, and industrial tools; and the balance is ground for abrasive grit. For the Siberian mines to produce some 3 million carats of gem quality diamonds, which were exported to the West, they would also have to produce a substantially higher quantity of drilling stones, die stones and other industrial diamonds. On the basis of Russian gem exports, De Beers analysts assumed that the Russians would also have an enormous amount of industrial diamonds to export. Instead, they found to their surprise that they were heavily increasing their imports of almost all categories of industrial diamonds except for abrasive grit (which they manufacture). Since by 1975 the Siberian mines were assumed to be producing in excess of 10 million carats of industrial-grade diamonds– a quantity that could not possibly be entirely consumed by Russian industry, De Beers’ executives wondered what had happened to the millions of missing Siberian drill and die stones. When asked about this quirk in the diamond equation, Russian geologists explained that Siberian diamonds could not be used for certain industrial purposes such as drilling and drawing out wire because they contained air bubbles that often explode under heat and pressure. In other words, Siberian diamonds were flawed for the very purpose they had originally been needed-industrial stones. This explanation raised more questions about the nature of Siberian diamonds than it answered. The De Beers sorters in London also noticed that the Siberian diamonds had some extraordinary aspects. For one thing, they tended to have a greenish tint to them and sharp angular edges, which differentiated them from most other consignments of diamonds in the De Beers vaults. Secondly, the diamonds were remarkably uniform both in size and shape. With very few exceptions, the entire consignment consisted of melees, or medium-grade diamonds ranging from one-tenth to seven-tenths of a carat in weight. The vast preponderance of these diamonds weighed about a quarter of a carat and fitted through a sieve opening that was one to two millimeters wide. Whereas African diamonds came to London in a multitude of shapes-round, square, oblong, flat, triangular and twisted-the Siberian diamonds tended to be mainly octahedrons with eight sharp edges. The consistent regularity of these diamonds made separating and evaluating them far easier. By 1976, De Beers was choking on the ceaseless flow of greenish diamonds that arrived each month in London on the Aeroflot let from Moscow. De Beers had little choice but to accept the consignments. Otherwise, the Russians would almost certainly dump these diamonds, which now amounted to some 2 million carats a year of gems, on the world market, and cause a ruinous collapse in prices. There was, however, a limit on the number of small diamonds that De Beers could absorb. The De Beers board of directors was becoming increasingly concerned with the seemingly magical capacity of the Siberian mines. They wanted to know how many more millions of carats of diamonds would be produced; and also why previous De Beers estimates of waning production in Siberia had proved so wrong. Before renewing its commitment to buy diamonds, De Beers asked the Russian authorities to allow a group of executives to visit the Siberian mines and make their own appraisal. The Russians agreed to the De Beers visit on the condition that Russian geologists be allowed to observe De Beers’ mines in southern Africa. Sir Philip Oppenheimer, who had conducted most of the negotiations with the Russians in London, arrived in Moscow in the summer of 1976. He was accompanied by Barry Hawthorne, who was then De Beers’ chief geologist in Kimberley, as well as a De Beers mining engineer, cost accountant and sales executive. Every night for nearly a week the Oppenheimer party was taken to the best restaurants in Moscow by various officials for caviar-laden meals. They also met during the day leading geologists, mineralogists, engineers and mine managers. Despite these thorough briefings, Sir Philip insisted on personally inspecting the mines, some four thousand miles away in Siberia. After some procrastination, the Soviet Diamond Administration finally organized air transportation to Yakutia for Oppenheimer and his associates. Fog delayed the flight for nearly a day, however, and by the time they had completed the arduous Journey to Mirny, they had to begin preparing for the return journey to Moscow, which had been very tightly scheduled. “We had about a twenty-minute tour of the mine,” Hawthorne recalled, “and seeing any other mine in Siberia was out of the question.” Even in that brief period of time, the Oppenheimer party was able to get some picture of the Siberian mining operation. The mine itself, which looked like any open-pit mine in South Africa, was far less deep than they had calculated. This meant that less ore had actually been taken from this mine since 1960 than De Beers had assumed, further deepening the mystery of how the Russians produced vast quantities of gem diamonds. The Oppenheimer party was next taken for a whirlwind tour of the treatment plant itself. They were “astounded,” as Hawthorne put it, to find that the Russians did not use water to separate the ore from the diamonds. In all the other diamond mines in the world, centrifugal baths are used to remove the non- diamondiferous material. An engineer explained that because it is too cold during the Siberian winters to prevent water from freezing, the ore at Mirny was first crushed by machines to a standard size and was fed through a battery of X-ray sorting machines. As a kimberlite geologist experienced with pipe mines in South Africa, Hawthorne found this explanation difficult to understand. In the De Beers diamond mines, more than 99 percent of the non-diamondiferous ore was washed away by the centrifugal baths, and thus only a minute fraction of the ore had to be processed through the X-ray machines. If they separated all the ore from the mine by X-ray machines, the separations would require over a thousand Sortex machines and millions of volts of electricity. Hawthorne subsequently told me that he had not seen any of the Sortex machines or any evidence of power lines at the mine site. Moreover, judging from such standard mining parameters as the surface area of the open pit, the depth of the excavation, the height of the waste dumps, and the capacity of the earth-moving equipment and other machinery, he found it difficult to account for the vast quantity of diamonds that the Soviet Union had sold to De Beers. In 1978 alone, it delivered Some 2.5 million carats of gem diamonds-almost one-quarter of the world’s supply. The enigma of the Russian diamonds became all the more perplexing when De Beers received fragmented reports about Russian advances in high-pressure physics. Even though the specifics of the Russians’ progress remained clouded in secrecy, it had become readily apparent to everyone in the diamond industry by the mid-1960s that Russian scientists had developed the technology for mass-producing synthetic diamonds for industrial purposes. Russian factories, located mainly in Kiev in the Ukraine, began to churn out a wide variety of diamond grit and other abrasives, which were offered for sale to European dealers; at international conferences, Russian technicians claimed that they had developed synthetic diamonds ten times larger than had been produced in the West. In 1966, Henry Meyer, an English mineralogist attended a conference on crystallography in Moscow with Dr. Kathleen Lonsdale, one of England’s foremost crystallographers, and a member of the Soviet Academy of Science. During the meeting, a Russian scientist told of the enormous progress the Russians had made in the field of high-pressure physics-including the construction of a hydraulic press some ten stories high-and offered to show the English scientists some crystals that had been produced in the laboratory. That afternoon, both Dr. Lonsdale and Dr. Meyer accompanied him to a research facility on the outskirts of Moscow where he produced a tray of some half dozen small, white gem diamonds, all perfectly shaped and weighing approximately a quarter of a carat apiece. Dr. Meyer, who specialized in analyzing the mineral inclusions in diamonds, closely examined the stones. They were not like any gem diamonds he had ever seen. The Russian scientist then explained that all these gems had been synthesized from carbon in a hydraulic press. He boasted that manufacturing gems was no longer a scientific problem in the Soviet Union but an economic one. Both English visitors were astounded at this casual disclosure. No laboratory in the West had come even close to synthesizing a gem diamond. (The General Electric breakthrough occurred later.) In Johannesburg, De Beers’ scientists soon heard of the Russian breakthrough, but they assumed that Meyer and Lonsdale had merely witnessed a laboratory experiment in crystal-growing, rather than any sort of new invention of technology. The following year, however, there was further confirmation. Professor Bakul, the director of the Soviet Synthetic Research Institute in Kiev, recruited Joseph Bonroy, one of the finest craftsmen in Antwerp, to cut and polish some highly unusual Russian diamonds. Bonroy, who specialized in sawing distorted and difficult-shaped stones, found these diamonds particularly difficult to penetrate. He saw that they were gem crystals of excellent purity and nearly ideal octahedron shape, but as he studied them, he found that they all tended to have very unorthodox sawing directions. To assist Bonroy, Professor Bakul explained that all the diamonds, which weighed about one-half carat and were slightly tinted, had been synthetically manufactured In Kiev, He asked the Belgian cutter to keep secret the fact that the Russians had manufactured gem diamonds, since, as Bonroy later put it, “the hypersensitive diamond market would be rocked by news such as this.” Bonroy found the solution to cutting the synthetic gems. When he completed the work, and polished and buffed the synthetic diamonds, they looked exactly like gem diamonds. Bonroy kept the secret of the Russian diamonds for four years. Then, in April 1971, he was asked to speak at a symposium in Kiev on the problems of cutting synthetic diamonds. Bonroy, concerned about the future of the diamond industry, asked Bakul whether the Soviet Union intended to mass-produce these synthetic gems. The professor pondered the question for a moment and replied that the Russians still found it economically unfeasible to synthesize gem-quality diamonds. It was, however, not clear from his answer what the conditions were under which the Russians would use this technology to manufacture diamonds. Even though the mysteries surrounding Russian diamonds were never fully resolved, De Beers succeeded in absorbing the constantly expanding production. Although at one point in the mid-1970s, it had to reduce its own production of diamonds from Namibia to accommodate Moscow’s, De Beers gradually developed new markets for diamond jewelry in both Asia and America. The De Beers arrangement with the Soviet Union was only for uncut diamonds. The Russians had always reserved a small percentage of its production from Siberia for its own Jewelry manufacturing. In the late 1960s, these Russian-cut jewels began to appear in ever-increasing number in the grading halls of Antwerp. Cut and polished in Russian factories in Moscow, Kiev and Sverdlovsk, the diamonds were called “silver bears,” and had some extraordinary features. To begin with, most silver bears were almost exactly the same size in girth, and weighed approximately two-tenths of a carat each. Moreover, each of them had the same octahedron shape, and they were nearly identically faceted and polished. It was almost as if, as one Belgian trader observed, the silver bears had all been cut from the same pattern. Initially, diamond experts in the West were baffled by the inordinate regularity of the silver bears. How could miniature diamonds that could fit on the tip of a pencil point be so identically matched in size, shape and cut? Louis Asscher, one of the renowned master cutters of Europe, attempted to resolve the question by microscopically examining a sample of silver bears. He had a lifelong experience with diamonds; his father, the third generation of the House of Asscher in Amsterdam, had re-cut the crown jewels for the British royal family in 1907, and he himself had invented and popularized the Asscher cut (the “brilliant cut” of a triangular diamond). When he studied the silver bears, he found that they all contained a similar striation mark on certain facets. He concluded that this tell-tale mark came from a machine, and he suggested that the Russians had invented an automated diamond-cutting machine that accounted for the silver bears. A number of master cutters in Antwerp took issue with Asscher. They found that the Russian cut on the silver bear was “too good, too regular, too perfect,” as one of them put it, to be anything but the work of skilled human hands. The Antwerp experts theorized that the Russians had imposed draconian standards on their diamond cutters, and diamonds that failed to meet these criteria were simply ground to dust and used for industrial purposes. They recognized that in order to achieve such uniform diamonds, the Russians would have to sacrifice a considerable portion of the average “yield”-the weight of the finished gem-but they assumed this was a cost that the Russians were willing to pay in return for standardization. As the Russians vastly stepped up their export of silver bears to Europe, the concern over Russian cutting techniques was replaced with a much more urgent one about their marketing objectives. The Russian diamond-trading organization opened up offices in rapid succession in 1969 in Antwerp, Zurich and Frankfurt. Italy began offering large discounts to American manufacturers, who needed a uniform product for their inexpensive assembly-line jewelry. In addition, reports reaching western Europe asserted that the Russians were training thousands of new diamond cutters at a center in Kostrana, some 180 miles north of Moscow. The Russian trading organization itself conspicuously avoided releasing any meaningful data on the volume of its exports of polished diamonds to Europe. By 1970, however, diamond dealers in Antwerp reckoned that the Russians were putting at least a half million silver bears on the market each year. Manufacturers in Tel Aviv, as well as Antwerp, became increasingly apprehensive about these Russian diamonds. What they had first considered a novelty now seemed a threat to the very existence of their respective cutting centers. The Soviet Union already was selling polished diamonds. For example, one New York dealer, Fred Knobloch, told me that he had been invited to Moscow on several occasions to buy cut diamonds by Russ Almaz, the Russian diamond-trading company. In Moscow, he described being escorted to a glass skyscraper at 29 Kalinin Prospect, where he was ushered into an austerely furnished room full of diamond buyers from Asian and European countries. A Russian official then emptied a canister of some 1,500 small polished diamonds, all under a carat in size. The official explained that the rules were the same as those insisted upon in London by De Beers, there was to be no bargaining, and cash had to be paid in advance of delivery. When Knobloch agreed to buy the lot of diamonds on the Russian terms, the Russian official said-ill perfect Yiddish-“Mazel und Brucha,” literally: “Good luck and blessings,” the same phrase that is used to conclude a deal on 47th Street in New York, Tel Aviv or Antwerp. A few feet away, at another table, he heard another Russian official saying “Mazel und Brucha” to a Japanese buyer. He realized then that the Russians were as capable as De Beers in conducting an international diamond business-right down to giving the traditional Jewish blessings. In its public statements, De Beers desperately attempted to calm these fears in the trade. In its 1971 issue of the International Diamond Annual, it went to considerable lengths to explain: There has been no indication that the Russian authorities have the slightest intention of “dumping” their polished goods on Western markets. On the contrary, the Russian authorities appear to accept that the industry they have been at great pains to develop and establish would founder if the market for diamonds in the Western world were undermined or were not held in strong hands. In their private deliberations, however, De Beers’ executives were far less certain as to whose “strong hands” the Russians wanted controlling the diamond trade. They certainly did not want to afford the Russians the opportunity of establishing direct relations with the American, Belgian, and Japanese wholesalers. If the Russians succeeded in bypassing the diamond distribution chain that De Beers had ingeniously devised over a half century, they obviously would be one step closer to taking over the diamond cartel from Dc Beers. The silver bear offensive raised a more immediate problem: the excess of silver bears had to be drained from the market and brought under control. De Beers therefore strongly encouraged a number of its own dealers to buy silver bears directly from the Russians and then, when market conditions were tight, redistribute them through their own marketing channels. The chief operative in this endeavor was Joseph Goldfinger, De Beers’ man in Tel Aviv. Goldfinger had been born in Lithuania, and studied to be a rabbi at the Yeshiva before emigrating to Palestine in the mid-1930s. When the diamond industry began in Natanya during the Second World War, he trained as a cutter, and then began dealing in both uncut and cut diamonds. In 1949, he was invited by De Beers to attend their sight in London, and quickly proved himself to be both resourceful and dependable. Because the Israeli industry was expanding at a breakneck pace, De Beers needed a distributor in Israel who could shrewdly apportion its supply of melee diamonds among the hundreds of small manufacturers scattered around Tel Aviv. Goldfinger, who had demonstrated that he had both the requisite energy and judgment, was given a “dealer’s sight” in 1962, which meant that he received diamonds not only for manufacturing himself, but also for redistributing to other Israeli dealers. By 1973, he was receiving up to $20 million worth of diamonds in his box at the London sights, and he had become De Beers’ third largest client. With this enormous sight from De Beers, Goldfinger became known as “Mr. Diamond” in Israel. He became heavily involved in every phase of the Israeli diamond industry and built up a network of wholesalers of polished diamonds that extended from Tel Aviv to Hong Kong and Tokyo. When the silver bear crisis arose, Goldfinger was logically the man that De Beers turned to: Not only did he have the vast experience in marketing small polished diamonds but he had a very strong interest in preventing the Russians from making inroads into this market. The original plan, in 1973, was for Goldfinger to go to Moscow and to buy from Russ Almaz the selections of silver bears most in demand by American and Japanese manufacturers. Together with the uncut diamonds that De Beers was itself buying from the Russians, these purchases of polished diamonds would help reduce the Russian exports to Europe to manageable proportions. The Soviet Union, however, in deference to Arab demands for a boycott against Israel, preferred not to deal directly with Goldfinger. Instead, it was arranged that I. Hennig, the broker next to De Beers on Charterhouse Street, would buy the diamonds in Moscow for Goldfinger’s account, and turn them over to Goldfinger in London. In early 1974, representatives of I. Hennig traveled to Moscow and were lavishly entertained by Dolnitsov, the head of AmRuz. The London brokers purchased substantial quantities of the silver bears for Goldfinger’s account, effectively withdrawing them from the market. On a subsequent trip to Moscow, the brokers were surprised to find that Dolnitsov had been replaced by a more dour official. No explanation for the change was offered. The arrangement remained intact, though, and the brokers were able to arrange delivery of some $2 million worth of silver bears a month. These preemptive buys succeeded in stabilizing the polished diamond market. Even as De Beers extends its alliance with the Russians, it remains extremely vulnerable to any Russian policy change. For example, in 1980, the Russian trading company slashed its price without warning on its silver bears in Antwerp by 15 percent. To prevent prices from failing, De Beers compensated by distributing fewer such diamonds to its own customers. Like the Goldfinger preemptive buyout, this was, however, only a temporary expedient. If Russia continues to expand its own production of both uncut diamonds and silver bears, De Beers will be unable to stockpile or sell the increment– or maintain the diamond invention. CHAPTER EIGHTEEN    THE AMERICAN CONSPIRACY Since the diamond invention was a mechanism for restraining competition in diamonds, it was in conflict with the anti-trust laws in the United States. The Sherman Anti-Trust Act states unambiguously that “any combination or conspiracy in restraint of trade” is a criminal offense in the United States punishable by fines and prison sentences. The Justice Department first became aware of the extent of the conspiracy to stifle competition in the diamond trade in the early 1940s, when the FBI conducted a series of interviews with American diamond dealers concerning their wartime supplies. It learned that De Beers systematically restricted production, fixed prices, and allocated markets, all actionable offenses under federal antitrust law. Even De Beers’ largest clients confirmed these operations. Harry Winston, for example, acknowledged to federal investigators that it was “a most vicious system,” and characterized De Beers as “an outstanding monopolistic concern.” In 1945 the Justice Department at last filed an antitrust case against De Beers and its associates. The court found that despite the evidence, it lacked jurisdiction. Since De Beers was a South African corporation that distributed its diamonds in London, and that the title for these diamonds changed hands outside the United States, the judge ruled that De Beers could not be held accountable under the laws of the United States. The Justice Department thus had to abandon the 1945 conspiracy case against De Beers. The legality of the diamond invention depended on De Beers maintaining a proper distance from its American customers. Yet the continued effectiveness of the invention required that it exert a measure of control, albeit invisible, over the crucial American market. This tension between the laws of the United States and the requisites of an international cartel forced refinements in the system. Some came abruptly. For example, in the fall of 1973, the owner of a well-known diamond firm in New York City found that Monty Charles, at De Beers’ Diamond Trading Company in London, would not accept any overseas calls from him. Before the war, his father had dealt directly with Sir Ernest Oppenheimer, and for twenty years or so he had always discussed by phone with Monty Charles the diamonds his firm needed for the coming year. Never before had Monty Charles refused to come to the telephone. Finally, after days of placing transatlantic calls, and arguing with the soft-spoken operator at Number Two Charterhouse Street, he was put through. Without giving the owner any opportunity to talk about diamonds, Monty Charles warned him, “This is the last time that I or anyone else here will speak to you. Do not, under any circumstances, call here again.” The diamond dealer was dumbfounded. How was he supposed to communicate with his main supplier of rough diamonds? Monty Charles suggested that he engage I. Hennig, a London diamond broker, to act as an intermediary in his future dealings with De Beers. The New York dealer could not understand why his longtime relation with De Beers changed so suddenly. He quickly retained Hennig, which is owned by Hambros Bank, a financial advisor to Harry Oppenheimer and De Beers. The new arrangement required that the dealer order his consignment of diamonds from Hennig, who would nominally purchase them from De Beers. In return for handling these transactions, the broker received one percent of the value of the consignments. Eventually, the broker explained that De Beers had changed its policy, not merely toward him, but toward all its American clients. Direct negotiation between De Beers and its American clients was no longer possible. The reason for this sudden refinement in its dealings with American customers in 1973 was that De Beers again found itself under investigation for violating the American antitrust laws. Indeed, a new grand jury had been convened, and a long list of American dealers subpoenaed to testify about their relations with De Beers. The antitrust division of the Justice Department reopened its investigation because it received a series of complaints indicating that De Beers might be secretly participating in the industrial diamond business inside the United States. Most of these reports came from tool and drill bit manufacturers, who believed that they were paying too much for industrial diamonds because of De Beers’ manipulation of the market. In 1967, the Justice Department received an unsubstantiated report implying that Harry Oppenheimer had personally attempted to buy a controlling interest in a small diamond tool manufacturer in Verona, New Jersey. The American owner rebuffed him. The Justice Department also received word that a number of key men who had worked for the Oppenheimer interests were being placed in strategic positions in American diamond firms. There was, of course, nothing illegal about Oppenheimer buying corporate interests in the United States, or in his ex-employees working in America; but these unconfirmed reports, if true, seemed to signal a change in De Beers’ strategy. In late 1970, there was a new development in the case. An anonymous caller, speaking from a pay phone in a muffled voice, began providing the lawyers in the antitrust division with evidence that suggested that De Beers was attempting a secret takeover of the industrial diamond business in the United States. The mysterious caller rattled off a list of names, places, transactions, bank accounts and subterranean corporate connections in the diamond trade. He also gave detailed accounts of secret meetings between American dealers and agents of the cartel, and the names of witnesses who could confirm these charges. The conspiracy he outlined went as follows: Before General Electric began mass-producing synthetic industrial diamonds, De Beers had been able to manipulate diamond prices from its offshore bases in London and Johannesburg. Now, however, with General Electric pouring out a virtually unlimited supply of industrial diamond abrasives, major users of industrial diamonds were no longer dependent on De Beers. The De Beers cartel then decided to intervene directly in the United States by covertly buying control of companies that distributed diamond grit and diamond drill stones. Through these companies, it guaranteed itself a share of the American market. Although Justice Department lawyers were initially skeptical of this furtive source, they found that many of his leads checked out. Moreover, the specific details he provided could only have come from someone who had access to the inner workings of the international diamond cartel. Gradually, other witnesses began to confirm the story. Nevertheless, the informant adamantly refused to meet with the lawyers of federal investigators or to disclose his identity. Even with the help of other informants, the task of tracing a conspiracy between De Beers and its putative American co-conspirators was extraordinarily difficult. To even approach the problem of establishing jurisdiction, the Justice Department lawyers had to weave their way through a bewildering maze of some 300 interlocking corporations, registered in Luxembourg and other convenient nations, which were either partly or fully controlled by the Oppenheimer interests. The lawyers also found that industrial diamond users, who were heavily dependent on De Beers and its subsidiaries for their supply of diamonds, were extremely reluctant to discuss openly their relations with De Beers. Finally, in December of 1971, the lawyers requested that a grand jury be convened so that potential witnesses could be compelled to testify and, if necessary, granted immunity in return for their testimony. To break through the walls of the corporate labyrinth, they decided to focus their investigation on the activities of two American firms closely allied to the Oppenheimer interests. The first was Engelhard Minerals and Chemicals, Inc., a diversified company incorporated in Delaware and based in New York City; the second was Christensen Diamond Products, a manufacturer of diamond drills serving mainly the oil industry, based in Salt Lake City. The founder of Engelhard Minerals and Chemicals, Charles Engelhard, was a well-connected American entrepreneur who had inherited a small metal fabricating company from his father. In the late 1940s, he had journeyed to South Africa to make his fortune. South African mines had a surplus of gold, but government regulations prohibited the exporting of gold bullion from South Africa without permits from the central bank, which were very difficult to obtain. Great Britain, which still controlled the financial affairs of South Africa, wanted to retain as much gold as possible within the sterling bloc. Engelhard found a legal loophole through that regulation: while it was illegal to export gold bars, it was legal to export objets d’art made of gold. Engelhard formed a company called Precious Metals Development that bought gold from the mines and cast it in the form of statues and other religious items. Engelhard exported these religious objets d’art to Hong Kong, where they were melted down and turned back into gold bullion, which could then be sold on the free market. (This ploy, used by Ian Fleming in his novel Goldfinger may had led to the apocryphal story that he based the Goldfinger character on Engelhard) While living in Johannesburg, Engelhard became a close friend of Harry Oppenheimer. Both men were approximately the same age and came from the same German-Jewish background. Both men were born millionaires, who later owned and controlled their own family businesses. And both men also shared a passion for racehorses (at one point, Engelhard owned 250 thoroughbred horses). Oppenheimer invited Engelhard to join the board of Anglo-American Corporation, and for his part, Engelhard invited Oppenheimer to participate in a number of mutually profitable joint ventures. The Justice Department investigators were especially interested in the relationship between Harry Oppenheimer and Charlie Engelhard. They theorized that Oppenheimer relied on Engelhard Minerals and Chemicals to provide the services, credit terms, and contacts necessary to keep its American clients from buying their synthetic diamond grit from General Electric. They concluded in a memo that “Oppenheimer turned to Engelhard to take up the GE challenge.” Specifically, Oppenheimer had arranged for Engelhard’s holding company, called Engelhard Hanovia, to become the American distributor for De Beers abrasive grits. “The idea was that grit sales needed a new ‘American look,’ with the old De Beers monopoly image less exposed,” the lawyers noted. They concluded that the entire scheme was intended by De Beers to avoid “exposing gem monopoly to antitrust sanctions.” In reconstructing this complicated arrangement, the investigators found that it was based on a quid pro quo. In return for acting as an intermediary for De Beers, Engelhard received all the costs for setting up a Swiss company called Prometco, plus a guaranteed profit of 100,000 English pounds a year. It was a fairly lucrative deal for Engelhard, and it also accommodated his friend Oppenheimer. The deal provided far-reaching benefits. In the mid- 1960s, Engelhard intervened on behalf of Oppenheimer to prevent the United States government from dumping its vast stockpile of industrial diamonds on the world market. Engelhard, who was one of President Lyndon Johnson’s chief fund-raises, offered to buy up one and one-half million carats of diamonds from the stockpile on condition that the Government promise not to sell any more diamonds for five years. He then planned to resell the American diamonds to De Beers. Not only would Engelhard personally make a tidy profit from the exchange but as a Justice Department review notes, “The commitment by the United States not to sell any more of the stockpile would be for the very purpose of protecting the monopoly of the diamond syndicate.” If the government entered into such an agreement, it would become increasingly difficult to bring an antitrust action against the monopoly at a later date. For this reason, the Justice Department vehemently protested the deal, and despite Engelhard’s personal influence with President Johnson, its protest prevailed. Engelhard had also begun to buy control of some important users of industrial diamond abrasives, including Supercut, Inc., then the third largest consumer of diamond grit in the United States, and Concut, Inc., a Midwest manufacturer of diamond tools and abrasive grinding wheels. These acquisitions provided Oppenheimer with leverage in the competitive battle, shaping up between General Electric and De Beers, for control of the synthetic market in America. Just as the Justice Department was about to file antitrust actions, Engelhard relinquished its right to be exclusive distributor of De Beers’ abrasive diamonds in the United States and devolved the distributorship to three industrial diamond dealers in New York, all of whom had close ties to De Beers. Engelhard arranged for Oppenheimer to buy a controlling interest in his far-flung empire, since he had no male heirs to take over. To do this, Oppenheimer set up HD Development Corporation, which was owned by Oppenheimer and Anglo-American. Behind this whirl of corporate maneuvers, Justice Department lawyers suspected an attempt by De Beers to carve up the American market for both synthetic and natural diamond abrasives. According to their theory, Oppenheimer used Engelhard’s companies in America as a cover under which De Beers could organize distributorships for its products, staff them with selected executives, and nominally give them to supposedly independent dealers. Proving the case in court, however, was a far more difficult matter, since when Engelhard was involved in the diamond business, Oppenheimer owned no part of it; when Oppenheimer bought control of Engelhard, it was no longer directly in the diamond business. Moreover, as the grand ‘Jury investigation gathered momentum, Engelhard Minerals and Chemicals severed all its visible connections with the diamond business. It not only disposed of the abrasive manufacturers it had bought, but locked away in its vaults all the records of its previous dealings with De Beers, its subsidiaries and its agents. Harry Oppenheimer and other South African directors of Engelhard, who were also directors of De Beers and Anglo-American Corporation, stopped attending the board of director meetings of Engelhard in the United States. The concern was that they would be subpoenaed to appear before the grand jury. The Justice Department heard from one of its sources that “the General Counsel for Engelhard … had a fit” when this possibility was divulged to the American members of the board. Justice Department lawyers also received reports that the ” [Baron] Rothschild on the De Beers’ board, upset at being told that he could not come to the U.S. because of the diamond investigation, has now resigned from the De Beers board”; and that “Harry Oppenheimer is extremely upset at not being able to come to the U.S.” In order to accommodate Oppenheimer and the other South African directors, Engelhard Minerals and Chemicals agreed to hold board meetings in London and elsewhere outside the United States. In September of 1974, Engelhard directors flew to London and met with Oppenheimer and a number of De Beers executives. According to a secret justice Department source, who had access to that meeting, there was an intriguing discussion between Oppenheimer and a top executive of Engelhard, of the implications of the investigation. According to the September 27, 1974, justice Department report, the executive guaranteed Oppenheimer that there would be no criminal indictments of De Beers’ personnel resulting from the diamond grand jury investigation. Moreover, “the executive demanded a substantial increase in his salary [because] … he would be required to have closer dealings with De Beers.” This raised the possibility that the diamond cartel and its allies might have found some way of intervening in the antitrust division. In a previous antitrust case involving the ITT corporation, President Nixon had blatantly attempted to prevent the antitrust division from pressing its suit. On August 4, 1974, the Justice Department received information that the “De Beers organization is a large contributor to both political parties and should this investigation get to a stage where cases were actually filed [the antitrust division] would probably receive much political pressure.” The informant also disclosed that one major diamond dealer in New York was in “constant contact” with Harry Oppenheimer and was somehow relaying to him “information on the progress of this antitrust investigation.” The diamond dealer in question was further alleged by this source to have “arranged the meeting for Harry Oppenheimer with John Kennedy when Kennedy was President-elect … at the Carlyle Hotel,” and to have served as an intermediary between Oppenheimer and American concerns in a number of deals. While this group of antitrust lawyers was at work trying to unravel cross ownership among firms that dominated the distribution and sales of diamond grit, a second team of lawyers was actively investigating an alleged conspiracy by De Beers to control the market for drilling stones. These industrial diamonds, ten to twenty times the size of abrasive grit, are crucially important for drilling for oil and other minerals. A single petroleum drilling bit, in which the block-shaped diamonds are inlaid in the metal cutting surface, may require more than $20,000 worth of diamonds; and without diamond drill stones, it would be practically impossible to drill many offshore and deep oil wells. Unlike diamond grit, drill stones cannot be economically synthesized, and therefore the drilling industry is heavily dependent for its diamond drilling bits on the natural stones excavated from the De Beers-controlled mines in Africa. In tracing through the subpoenaed records of the drilling companies in the United States in the early seventies, the antitrust lawyers found that a single American company and its subsidiaries supplied most of the diamonds for petroleum drill bits: the Christensen Diamond Product Company. Moreover, through informants and other sources, they learned that Christensen and his company had a long-standing involvement with the Oppenheimer interests. Frank L. Christensen, a former football player from Detroit, had built up during the 1950s a firm that specialized in providing diamond-cutting ties to the automotive industry. When he visited Johannesburg, he developed a friendship with E. T. S. Brown, a robust De Beers executive, who headed its Industrial Diamond Division. Ted Brown, as he was called, spent considerable time showing Christensen around South Africa and he soon found in the ex-football star the sort of hard-driving entrepreneur he had been looking for to expand De Beers’ sales in the United States. Brown’s division had just developed a specially treated diamond that was especially efficient as a drilling stone, and he encouraged Christensen to use it to make drilling bits for the petroleum industry. Since De Beers itself could not operate in America, Brown began channeling the better quality bits to Christensen’s firm, which rapidly increased its share of the American market. In 1960, Brown made Christensen an offer he apparently could not refuse. A De Beers subsidiary in Luxembourg, called Boart International S.A., would buy a 50 percent share of Christensen’s stock; working together, Christensen and De Beers would dominate the drilling business throughout the world. Christensen agreed, and in conjunction with Brown, who was also managing director of Boart International, he bought shares in other drilling contract companies in the United States and Venezuela. By 1970, Christensen and his silent partners at De Beers controlled well over 50 percent of the petroleum drilling business in the United States; through subsidiaries his firm also attained a dominant position in most other kinds of large-scale drilling industries all over the world. After subpoenaing a host of witnesses before the grand jury, the Justice Department concluded that Christensen and De Beers had acted in a “conspiracy … to suppress competition among themselves, to require and increase consumption. of De Beers processed diamond drill stones, and to fix, maintain and stabilize world market process for such diamonds.” A Justice Department analysis noted that “a key feature of the plan has been the formation of a worldwide network of companies ‘Jointly owned by Boart and Christensen Diamond Products to consume De Beers processed diamonds … [and] the acquisition of stock interests in Longyear and Boyles Bros., two of the largest consumers of diamond drill bits in the United States, and the foreclosure of the substantial purchase of diamond drill bits by these competitors to competitors.” Since ownership of these companies was concealed through a tangle of corporations registered in Luxembourg and the Netherlands, the Justice Department concluded: “Much of this conduct was done so as to be secret and misleading, and much was done with full knowledge that there was grave risk of violating U.S. antitrust laws.” While the Justice Department lawyers were proceeding in 1971 to place the final pieces in their case against De Beers and its American associates, they learned of a startling new development. De Beers had relinquished its entire interest in Christensen Diamond Products by having its Boart International subsidiary sell back to Christensen Diamond Products all the stock that it owned in the company. This timely reorganization effectively undercut the entire antitrust case by legally divorcing De Beers from the American company, the main target of the long grand Jury investigation. Even though one of Christensen’s major shareholders warned the Justice Department that the purpose of this sudden move by Oppenheimer was to avoid a protracted antitrust suit, and that “after the exchange of stock and rearrangement on the corporate structures … De Beers would still control Christensen Diamond Products,” there was little that the Justice Department could do. As one of the antitrust lawyers on the case explained to me, “After all, the remedy we had been proposing all along was to compel De Beers to sell its stock in Christensen, and when it did it of its own accord, it left us without much ground for proceeding against it.” In the end, the Justice Department had to settle for a token victory. Two distributors of diamond grit, Anco and DAC, both of whom had their De Beers distributorships devolved on them by Engelhard, were indicted for price-fixing. On April 8, 1975, both firms pleaded nolo contendere to charges, and received inconsequential fines, $30,000 for DAC and $20,000 for Anco. Both distributors and a De Beers subsidiary in Ireland entered into a consent judgmentthat enjoined them in the future from fixing the price of diamond grit in America, allocating territories or entering conclusive bids. Since, however, the vast majority of diamond grit was manufactured synthetically by 1975, and De Beers had no real monopoly over the supply of this synthetic grit, the court injunction had meant little to De Beers. Even without the injunction, De Beers already had to compete for its share of the diamond grit market in America. In winning this battle, the Justice Department abandoned the war to break the De Beers stranglehold over gems and strategically important drilling stones, the very areas which have not been replaced by synthetic diamonds. The conspiracy case thus ended with the diamond invention intact. If history and criminology interests you continue to grow your knowledge of these topics with an online university

On December 21, 1952, a small Austen Autocrat aircraft cut off its single engine and quietly glided to a landing on the diamond-strewn beach in the forbidden zone in Namibia. The plane taxied to a halt on the sand as the sun began to rise over the Namib Desert. It was Sunday, and except for the two men in the plane, the beach was entirely deserted. One of the men was a former geologist for De Beers who, while prospecting in the forbidden zone, had managed to hide a container of some 1400 diamonds; the other man was a South African pilot, hired the night before for this mission. The geologist got out of the plane and retrieved the cache of diamonds that he had squirreled away six months earlier. When he returned with the container, the pilot started the engine. The plan was to escape before the first dawn patrol. But the plane’s landing gears were embedded in the sand, and it could not take off. A few hours later, security officers spotted the plane. Both men were arrested-and after a brief interrogation, the geologist confessed that he had planned to steal the diamonds he had found on the beach while in the employ of De Beers. (Their incident provided Ian Fleming with the opening scene of his James Bond novel, Diamonds Are Forever.)

When the two men were brought to court, their lawyer argued that the original concession for diamond prospecting extended only to the high water mark on the beach, and since the plane had landed on the seaward side of this demarcation line, the men had not violated the sanctity of the forbidden zone. The De Beers subsidiary holding the concession argued that its rights extended to the low water mark and that therefore the men were trespassers. To the surprise and dismay of De Beers, the judge accepted the defendant’s contention. Not only were both men acquitted but, more far-reaching, De Beers was held not to control legally the rights to the submerged portion of the 200-mile long forbidden zone.

While De Beers attempted to redress this definition of the forbidden zone in the appellate courts, a brash, young, oil pipeline lawyer named Sammy Collins persuaded the authorities in Namibia to grant him a prospecting concession for the underwater portion on the diamond beach. He then, in 1961, sold shares in a company called the Marine Diamond Corporation, and with the proceeds, equipped a barge with giant suction hoses, pumps, and other dredging gear. By August of 1962, Barge 77, as it was called, began recovering small diamonds from the ocean floor. A few weeks later, Barge 77 sank in a storm, and Collins had to build second barge.

In 1964, Collins was back in full production. The pumps on his barges were sucking 30,000 carats of diamonds a month out of the sea. Although almost all these diamonds were of gem quality, most were extremely small, averaging about .45 carats apiece. Collins predicted that when the dredging system was perfected, it would yield much larger diamonds. He informed his financial advisors that he planned ultimately to have fourteen barges operating in the ocean off the Namibian coast, and that these ships would recover more than one million carats worth of gem diamonds a year. If realized, this production would in the mid-sixties be equivalent to nearly one-fifth of the world’s gem diamonds.

De Beers obviously could not afford to have such a competitor working alongside its most lucrative mines in the forbidden zone. To succeed in his ambitious venture, Collins had to demonstrate to his financial backers that he could sell the diamonds at a profit as well as recover them. And De Beers still had some influence on the market for small diamonds. In 1964, most of the factories that could cut and polish diamonds less than a half carat in weight were located in Israel and were, directly or indirectly, clients of De Beers’ Diamond Trading Company. Suddenly, these Israeli manufacturers found that the boxes they were receiving at the London sights were brimming over with the same categories of small diamonds that Collins was producing in Namibia. Moreover, it was made clear to at least one of Israel’s leading manufacturers that if he bought any of Collins’ diamonds, his supply from De Beers would be cut off.

Collins discovered that despite his enterprise in dredging diamonds from the ocean, there was no ready market for them. Despite the shortage of immediate revenue from the sale of diamonds, Collins was committed to an ambitious program of building and outfitting barges. By 1965, he found that the Marine Diamond Corporation was drained of all its cash resources and faced with bankruptcy. There was, moreover, little possibility of raising additional capital from outside banks, since it was clear to everyone concerned that the market for these diamonds was controlled by the diamond cartel. Under these conditions, Harry Oppenheimer offered to buy the Marine Diamond Corporation.

Collins had no choice but to accept, and within months, his company became a subsidiary of a De Beers subsidiary. De Beers then gradually reduced the dredging operation and closed it entirely in 1971. Collins, the would-be competitor, died in retirement in South Africa in 1978.

De Beers was confronted with another potential competitor in the mid-1970s, Albert Jolis. Jolis, a resourceful American, who had served in the OSS during World War 11, headed an international diamond firm called Diamond Distributors, Inc., or DDI. His father, Jac Jolis, had once worked for De Beers, and for three generations the Jolis family had a close business relationship with the Oppenheimers. Indeed, in the late 1940s, Sir Ernest had encouraged Jolis’s father to establish a diamond-cutting factory in Los Angeles, and he had promised him a supply of uncut diamonds for the venture. Then, without any prior warning, Oppenheimer decided against the Californian venture and refused to provide any diamonds for it. No explanation was ever tendered, and the Jolis family was expected to take the loss without asking any questions. From that point on, Albert Jolis was eager to break the dependence his family had on De Beers. He negotiated a deal in the French territory of Ubangi, which became the Central African Empire, and set up diamond-buying offices in Venezuela and Brazil. These countries provided only a small fraction of the diamonds his firm sold, and thus he still had to rely on De Beers’ sights in London for the lion’s share of his diamonds.

In 1975, however, Jolis saw a golden opportunity to acquire a major diamond concession in Angola. Until then, Angola had been a Portuguese colony, and its diamond fields, which produced 1.5 million carats of diamonds a year, had been under control of a Portuguese-based company, Diamondco, which was partially controlled by De Beers’ stockholders. Diamondco sold all of its diamonds under long-term contract to the Diamond Trading Company in London. When Portugal decided to withdraw from Africa in 1975 after more than 200 years of colonial rule, the diamond concession was again up for bidding. Angola itself was at the time on the brink of civil war.

Three rival factions shared the positions in the transition government. Each was determined to seize power for itself; and each was secretly receiving arms and mercenary assistance from foreign intelligence services. The MPLA, which had spearheaded the guerrilla war of independence against Portugal, was backed by the Soviet Union and Cuba. The FLNA, whose forces had been given sanctuary and training in neighboring Zaire, was supported by the United States, North Korea, China, and Zaire. And UNITA, which was allied to the dominant Ovambo tribes in southern Angola, had even a more curious medley of sponsors, Zambia, Tanzania and South Africa. (A fourth faction, FLEC, not represented in the government, advocated the secession of the oil-rich enclave of Cabinda and was backed by French oil interests.) In this maelstrom of international intrigue, even De Beers, with all its resources, could not immediately exert influence over the diamond fields. It was first necessary to pick the eventual winner in the power struggle.

Jolis saw the possibility of obtaining the Angolan concession-and dealing with the cartel from a position of strength. Flying to the Angolan capital of Luanda, Jolis made contact with Jeremias Kalandala Chipanda, Minister of Natural Resources in the transitional government. A mining engineer by training, Chipanda turned out to be extremely well-informed about the diamond business. He had personally inspected the diamond fields, and he suspected that the De Beers cartel had deliberately retarded the development new riverbed mining in order to hold down the world supply of diamonds. He reasoned that if these riverbeds were more aggressively mined, diamonds could earn more foreign exchange for his country.

In their negotiations, Jolis managed to persuade the Angolan minister that his company, unlike De Beers, would have a competitive incentive to develop the fields as rapidly as possible. Moreover, he promised to train black technicians (De Beers had trained only eight in all of Angola). Jolis also flew in a geologist, who prepared a comprehensive report on Angola’s mineral wealth.

After weeks of wining, dining, and briefing the minister and his staff in Luanda, an agreement was finally reached. Jolis’s firm would be given a large portion of the concession formerly held by a De Beers subsidiary on the condition that it would accelerate the development of the diamond fields. Jolis returned to New York that spring and began making arrangements to hire personnel and to market the Angolan diamonds. Although he realized that the final outcome of his venture in Angola would depend on how the political crisis there was resolved, he had high hopes of success.

That summer, however, the political situation changed radically. The Soviet-backed MPLA faction seized Luanda in July, initiating a full-scale civil war. The transitional government was quickly deposed-with Minister Chipanda, a supporter of the UNITA faction, fleeing into the jungle. With the assistance of Soviet rockets and Cuban troops, the MPLA forces quickly routed the other two rival factions (despite aid to them from the CIA). By the year’s end, the MPLA was in almost complete control of Angola.

Early in 1976 Jolis learned that his diamond concession had been canceled by the new MPLA regime. Moreover, his geologist and staff had been denied visas. When he attempted to make contact with government officials his calls went unreturned.

Jolis finally arranged for someone in Angola with connections to the MPLA Angola to investigate the loss of this concession. In Luanda, his intermediary made inquiries at the Ministry of Natural Resources and eventually obtained an internal staff report that cleared up the mystery. According to this document, the Soviet Union had specifically instructed its MPLA allies to cancel all agreements and negotiations with Jolis’s Diamond Distributors, Inc. Adding insult to injury, the Soviets had further advised the Angolans that Diamond Distributors, Inc., was an established front for De Beers. Since the MPLA had strictly forbidden Angolans from trading with South African companies, this piece of misinformation linking Diamond Distributors, Inc., to De Beers effectively precluded the former from doing any business in Angola.

When Jolis read the contents of this report, he realized that he had been cleverly maneuvered out of Angola and bested by De Beers. The only remaining question was what would happen to the Angolan output of diamonds, which, though severely diminished by the chaos of civil war, still had to be disposed of.

Under Soviet guidance, the MPLA arranged to sell the entire production of its diamond fields to a supposedly independent firm in London named the Diamond Development Corporation. The Angolan diamonds actually went to the offices of the Diamond Development Corporation in Chichester House, near Holbein Circus on the fringes of London’s financial district. The Diamond Development Corporation, putatively in the business of sorting and selling African diamonds, was in turn owned by the Chichester Corporation, which itself is controlled by subsidiaries of De Beers. Both corporations were established by De Beers to provide a double-cover for its dealing with African nationalists. As one former De Beers executive explained, “If the Angolans ever demanded an interest in the Diamond Development Corporation, the assets and profits could be shifted to Chichester.” The shipments of Angolan diamonds were driven around Holbein Circus to Number 2 Charterhouse Street, headquarters of the Diamond Trading Company. Through this circuitous route Angola’s diamonds again entered the De Beers stockpile. Then, with the assistance of Cuban troops, the Angolans also managed to close down the smuggling routes between the diamond fields and the Congo border.

Of all the competitive threats to De Beers, the potentially most dangerous came from Harry Winston in New York. A short, determined man, Winston had made his own fortune in the diamond business. He had been born in 1900 in a walk-up tenement apartment in New York City, and by the age of fourteen had quit school to join his father in the jewelry business. He quickly discovered a diamond “mine” in estate jewelry. Buying up diamonds from estates, with financing from the banks, he found he could re-cut and sell them at a profit. He arranged to mass-merchandise these diamonds through chain stores. By 1940, he was America’s largest diamond dealer. Consequently, he received the largest consignment of uncut diamonds from De Beers.

After World War 11, Winston rapidly expanded his American business. He opened up his own diamond factories in New York City, Puerto Rico and Israel. He also became the dominant wholesaler in America, supplying the major department stores and chain stores with their diamonds. Indeed, by 1951, he was distributing more than one-quarter of all the engagement diamonds in the United States. He even discussed plans of acquiring his own diamond mine and bypassing the diamond cartel entirely.

He first negotiated with Colonel Williamson for his concession in Tanganyika, but he realized that the British colonial authorities would never allow him to jeopardize De Beers’ control of the diamond trade. Tanganyika (now Tanzania) was then a British colony.

In 1953 Winston saw a more promising opportunity in Angola. De Beers, attempting to renegotiate its contract with the Portuguese for the diamonds, had run into a snag over foreign exchange. The conflict concerned whether the Portuguese would be paid in dollars for their diamonds, as they preferred, or in British pounds, which De Beers preferred.

Winston flew to Lisbon to make his offer. There he made contact with Spiros Assantos, a well-connected banker who was influential in the Salazar government that ruled Portugal, and worked out with him a detailed plan to outbid De Beers for the diamonds. Since he could provide for Portugal a guaranteed market in the United States, which accounted for the sale of three-quarters of all gem diamonds in 1953, and could also pay in dollars, which Portugal desperately needed to balance its foreign exchange deficit, Spiros Assantos was confident that his bid would prevail.

Unfortunately, at a critical point in the negotiations, Spiros Assantos died on the operating table in a Lisbon hospital. Winston was left without a contact in the Salazar government. Soon afterward, he received a telephone call from Sir Ernest Oppenheimer warning him that if he persisted in his efforts to interfere in the negotiations, he would be entirely cut off from De Beers’ diamonds. On the other hand, Sir Ernest suggested, if he withdrew from the negotiations, his consignment in London would be substantially increased at the sights. While he was still mulling over this offer, he received an ultimatum from the Foreign Ministry. He had forty-eight hours to leave Portugal. He then decided, as he later explained to his son Ronald, that “he had a business to run in New York,” and boarded the next plane to the United States.

Winston learned several months later from his financial associates in Lisbon why the government had issued this ultimatum. They told him that the British ambassador had intervened directly with the Salazar government, warning that the entire diamond system would collapse if Portugal bypassed De Beers and sold diamonds directly to Winston. The British government threatened that unless the Salazar government ended the negotiations with Winston and restored its contract to De Beers, it would place an embargo on all port wine imports. Since port was a crucially important export for Portugal, and England was its main market, the Salazar government ordered Winston to leave the country.

Winston, still seeking a diamond concession, next went to the West African country of Sierra Leone, also a producer of diamonds. He again tried to undercut the existing arrangement De Beers had with the British mining company that held the concession. This time, however, Oppenheimer made Winston an irresistible offer. Aside from his regular consignment of diamonds, Oppenheimer promised Winston 22 percent of all the diamonds produced from mines along the Atlantic Ocean beaches of Namibia, the richest single source of gem diamonds in the world. By guaranteeing, himself 22 percent of these highly prized diamonds, Winston would have a virtually unassailable position in the American diamond market. Moreover, Oppenheimer offered to give Winston the right to choose the diamonds he wanted from the West African fields. In return for granting him these advantages, Oppenheimer expected Winston to abandon his search for his own diamond mines. Winston agreed to these terms.

The uneasy truce between De Beers and Winston prevalled for almost a decade. De Beers, however, saw the arrangement as only a temporary expedient; and Winston still sought to sever his dependence on Dc Beers. In the early seventies Winston saw yet another possible source of diamonds: Siberia. He quietly opened up negotiations, through the Soviet trade delegation in London, to acquire a major share of the uncut diamonds coming from Siberian mines. He had, after all, his own cutting factories and the main distibution network for diamonds in the United States. Despite these assets, Winston underestimated the strength of the silent partnership between the Soviet Union and De Beers. In 1975, his overtures were flatly turned down.

De Beers, meanwhile, began a maneuver that would severely curtail the ambitions of Harry Winston. It began providing a large number of diamonds at its sights to Star Diamonds, owned by Sal Klagsbrun, a close friend and golfing partner of Monty Charles. Star Diamonds began to sell its diamonds in direct competition with Winston. In 1978, Harry Oppenheimer told Winston on the telephone that he would no longer receive the consignment of diamonds from Namibia that his father had arranged for him to receive at each sight. Winston reportedly became furious, and told Oppenheimer that Sir Ernest would never have gone back on his word.

Winston died soon afterward. Star Diamonds rapidly expanded its market share in America, and hired in 1979 some thirty additional salesmen in California. It then made an offer to Ronald Winston, who had succeeded his father, to buy his business. Ronald Winston refused to sell.

Afterwards, Ronald Winston found his allotment progressively smaller at each sight. Whereas his father had once received the largest single sight— some $20 million in a single box— Ronald now was receiving only a small fraction of his firm’s needs, less than $2 million in 1980. Winston’s pleas to Monty Charles to increase his allotment fell on deaf cars. Meanwhile, Star got more than $20 million in its box at a single sight. On an annual basis, Star was getting nearly ten percent of De Beers’ total allocation. So Winston was forced to buy most of his diamonds on the secondary markets in Antwerp and Tel Aviv. Although he managed to keep a large share of the American wholesale business, he found it increasingly difficult to compete with the cartel. His profits were tightly squeezed.

Despite De Beers’ success in suppressing individual competitors, major refinements in the design of the diamond invention were necessary to preempt challenges from the Soviet Union and other producing nations. The diamond cartel could no longer sustain the value of diamonds merely by controlling the production of the mines in southern Africa; it now needed to extend its reach “downstream” to the cutting, distributing, wholesale and even retail elements of the diamond trade to prevent the Soviet Union and others from establishing their own sales network. De Beers, in effect, had to compete with its own clients.

In 1975, De Beers opened up a small cutting factory in Lisbon. To allay the fears of clients, Dc Beers spokesmen stressed that the purpose of this factory was to monitor market conditions and keep track of smuggled diamonds that were arriving in Lisbon from Angola. They stressed that they had no intention of using the Lisbon factory to compete with clients. The following year, De Beers organized and financed Lens Diamond Industries in Antwerp (though the ownership remained in the hands of De Beers’ shareholders rather than with De Beers itself). Lens built a huge factory, initially employing 545 workers, who sawed De Beers’ rough diamonds into basic shapes then distributed them to the cutting factories in Antwerp for faceting and polishing. It was the largest such facility in the world, and with it, De Beers had the potential for completely dominating the cutting industry in Antwerp. When a number of Antwerp manufacturers voiced their concern that De Beers was taking over an important part of their trade with this factory, De Beers’ head of public relations, David Nell-Gallagher, answered that De Beers’ sole purpose in building this factory was to give stable employment to Belgian sawers who might otherwise be tempted to leave Antwerp’s diamond industry for more lucrative opportunities in the automotive industry.

Yet, even as De Beers rationalized its entry into the sawing business in Antwerp, it began construction of a second sawing factory in Tel Aviv. Clearly, a part of the new design was to take over the task of sawing uncut diamonds into their basic shapes.

In South Africa, De Beers provided financial assistance to small and supposedly independent diamond-cutting factories in and around Capetown. It sent a large number of Pieromatic automatic diamond-cutting machines to these factories, and by 1980 Some 20 percent of the world’s diamond cutting machines were operating in Capetown. It also trained workers of racially mixed origins, classified under South Africa’s apartheid laws as “coloreds,” to polish the diamonds, which provided the Capetown factories with the cheapest labor force outside of India.

As the Capetown factories went into production, De Beers made arrangements for them to contract to sell their entire production to major Hong Kong dealers. Ho Pak Tao, one of Hong Kong’s leading diamond dealers, told an American trade journal in 1979, “We used to depend on Israel for small goods but now we are using ‘coloreds’ and automatic machines to cut small goods in our South Africa factory .” Aside from the Hong Kong-to-Capetown connection, De Beers initiated a program of supplying selected Hong Kong manufacturers with pre-sawed diamonds from its Lens factory in Antwerp.

The developments in Capetown and Hong Kong were viewed with consternation by Israeli manufacturers who had previously considered the $300 million Hong Kong polishing market their private preserve. With these embryonic cutting factories, De Beers now had considerable leverage over the Chinese dealers, and through them, access to the entire Southeast Asian market for polished gems.

In India, De Beers also sought to expand its sphere of influence over the manufacturing of diamond chips. In October of 1979, it set up the Hindustan Diamond Corporation, in India, as a partner. Since the Indian government preferred not to be openly associated with a South African corporation, De Beers accommodatingly arranged that two Bermuda corporations, in which it owned substantial shares, be nominal owners of the De Beers interests in the Hindustan Diamond Corporation. Under this arrangement, the Hindustan Diamond Corporation became a distributor of De Beers’ diamonds in India. It contracted to buy large quantities of diamonds, most of them less than a tenth of a carat, and allocated them among manufacturers in the Bombay area. The Indian manufacturers, in turn, farmed these minute diamonds out to a cottage industry of some 300,000 workers, mainly women. With the support of the government in this venture, De Beers established a modicum of quasi-official control over this segment of the polishing industry.

De Beers also became a major dealer in polished diamonds through an Antwerp subsidiary called Diatrada. Diatrada had buying agents for Diatrada buy large quantities of polished diamonds from manufacturers and resell them to wholesalers. A similar operation was opened in Tel Aviv, which by 1979 became the single largest purchaser of diamonds in Israel. Among other things, De Beers uses these buying offices to maintain the price of polished diamonds during periods of recession and glut. When a certain size or quality diamond becomes excessive and can not be easily disposed of on the trading bourses of Antwerp and Tel Aviv, Diatrada steps in and buys up the surplus. At the same time, De Beers deletes or heavily reduces the category of uncut diamonds that yielded this particular type of polished diamond at its sights in London. The net effect of these coordinated actions is to create an artificial shortage of this type of diamond and drive up the price. Diatrada gradually resells its inventory of polished diamonds at the higher price.

To further solidify its position in polished diamonds, De Beers began holding regular sights for major dealers in polished diamonds in Lucerne, Switzerland. In 1978, De Beers pressed these clients into doubling their annual purchases of polished diamonds, and most of them agreed to the larger consignment. The following year, De Beers distributed over $ 300 million worth of finished gems at these sights.

Despite the fact that De Beers captured nearly one-quarter of the entire polished diamond business, its executives continue to minimize its role in this area. Harry Oppenheimer, for example, said, in an interview in Jewelers’ Circular Keystone in September 1979: “Our polished dealing operations were begun some years ago, principally to give us a better insight into the functioning of the market, they act as a market listening-post, if you like.” In Antwerp, De Beers’ move into the polished diamond business was seen as a fait accompli. “They are already competing with their own clients in polished goods,” a governor of the Antwerp Diamond Club stoically observed. “They have the diamonds, the capital and the connections. Those are the facts of life.” Independent dealers saw the handwriting on the wall. Ben Bonas, one of De Beers leading brokers explained ” De Beers will run the entire polished diamond show, just as it runs the uncut diamond trade now. It has to, if only to keep the Russians out.”

CHAPTER TWENTY
HAVE YOU EVER TRIED TO SELL A DIAMOND?

De Beers’ advertising slogan, “A Diamond Is Forever,” embodied an essential concept of the diamond invention. It suggested that the value of a diamond never diminishes and that therefore a diamond never need be sold or exchanged. This precept, of course, is self-fulfilling: As long as no one attempts to sell his diamonds, they retain their value ( assuming the cartel controls the supply of new diamonds). When, however, an individual is forced to defy this principle by attempting to sell diamonds, the results can prove illuminating. Consider, for example, the case of Rifkin’s Russian diamonds. In the fall of 1978, a thirty-two-year-old Californian computer wizard named Stanley Mark Rifkin discovered an ingenious way to become a multimillionaire overnight. While working as a consultant for the Security Pacific National bank in Los Angeles, he had learned the secret computer code that the bank used to transfer funds to other banks telegraphically at the end of each business day. With this information and his mastery of the bank’s computer, he realized that he could transfer tens of millions of dollars to any bank account in America. The problem would be withdraw the money from the system. In early October, he devised a plan for siphoning this money out of the bank and converting it into Russian diamonds. The first step was establishing an alias identity. Under the pseudonym “Mike Hanson,” Rifkin opened a bank account at the Irving Trust Company in New York, arranged a phony passport and other. documentation and retained a respected diamond broker, Lou Stein, to acquire for him a multimillion dollar consignment of diamonds from Russia. The Russian diamond organization, Russ Almaz, agreed to sell “Hanson” at its fixed wholesale price 115,000 perfectly cut, round, brilliant stones for $8,145,000. For arranging this low price, the broker took a standard 2 percent commission, or $162,000. For the deal to be consummated, Rifkin only had to wire the money to Zurich. On October 25, Rifkin coolly entered the bank’s transfer room under the pretext of inspecting the computer. He picked up a telephone connected to the computer and dialed in the necessary digits. Instantly, the computer withdrew $10,200,000 from a non-existent account and transferred it to the account of “Mike Hanson” at the Irving Trust Company in New York. Rifkin then had the New York bank transfer $8,300,000 to the Zurich account of Russ Almaz. A few days later, using his phony passport, Rifkin flew to Switzerland, took delivery of the diamonds, which weighed under five pounds, and smuggled them through customs into the United States. He then began contacting dealers in Los Angeles, but none was willing to buy the diamonds. Meanwhile, the Security Pacific National Bank discovered that more than ten million dollars was missing. It was one of the largest bank robbery in history. The FBI, investigating the loss, received a tip about Rifkin, and arrested him in Carlsbad, California and found on him the Russian diamonds, as well as the remaining cash. Initially, bank officials assumed that most of stolen money prudently invested in diamonds would be easily converted back to money. Only a few weeks earlier Newsweek had reported in a cover story, “The Diamond Boom,” that diamonds were “the ideal asset” and that quality diamonds were soaring in price. While the diamonds that Rifkin had bought were commercial-grade stones used in jewelry. the London-based Economist Intelligence Unit had such diamonds, which had increased by at least 50 percent that year, were still increasing in price. Independent appraisers estimated that the diamonds, which Rifkin had bought at a low price, were worth at least $13 million at the retail level, and so the I bank foresaw that it might make a profit of some $5 million with the reported appreciation in value of the diamonds. In anticipation of this windfall, they agreed to pay the ten percent custom tax on the diamonds which Rifkin had evaded, as well as part of the cost of the FBI investigation. Before this expected profit could be realized, the bank had to await the outcome of the trial, since the diamonds were important evidence. Finally, in September 1978, the bank announced that it would sell its hoard of diamonds to the highest bidder. Twelve major dealers were invited to the bank’s vault to inspect Russian diamonds. They were instructed to submit sealed bids by the end of the business day on September 18. A minimum price Of $7.5 million was established to encourage high bids, though independent appraisers assured the bank that the diamonds would fetch far more. On the day of the auction, bank officials anxiously waited to see how much profit they would garner from the diamonds. However, only a single bid had been submitted, and when it was opened, it was for several million dollars less than the minimum. The bank officials were disappointed at this turn of events. Even though the diamonds had been purchased through a reputable broker at wholesale price, no American dealer would pay anywhere near this price nearly a year later. The bank offered to sell the Russians back their own diamonds at the original 1978 Price. But they refused to buy the diamonds back at any price. The bankers learned that two Israeli banks were also trying to sell large quantities of diamonds received as collateral from Tel Aviv dealers; and this might make it far more difficult, if not impossible, for the Security Pacific Bank to unload its 115,000 diamonds. So they decided not to wait any longer. Walter S. Fisher, the vice-president of Security Pacific, was charged with the responsibility of selling the 115000 diamonds. He realized that diamonds were not a standardized, or fungible commodity, as were gold, silver and platinum. Different appraisals of the same diamonds varied widely dependent on what the prospective buyer thought he could sell them for. And, though all the bank’s diamonds were commercial stones for the mass market, Fisher found that it was extraordinarily difficult to find a buyer. None of the dealers in the United States were willing to buy such a large consignment of diamonds. Fisher found it necessary to deal through De Beers’ main broker in London, I. Hennig. Finally and accept the terms dictated by the buyer, if he wanted to sell the diamonds. He then had to deliver the diamonds to an unknown corporation in Liechtenstein, G. S. G. Investments, without receiving any money for them for eighteen months. These were terms that the bank probably would not have accepted in selling any other commodity. With a flourish of understatement, the banker concluded, “Selling diamonds is far more difficult than I had anticipated.” While the Security Pacific National Bank’s problem was made worse because it had to dispose of the diamonds quickly, even when diamonds are held over long periods of time, selling them at a profit can prove difficult. For example, in 1970, the British magazine Money Which tested 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 $1,000. For eight years, it kept these diamonds in its vault, inflation ran As high as 25 percent a year. For the diamonds to have kept pace with this inflationary spiral, they would have had to increase in value at least 300 percent. When the magazine’s attempted to sell the diamonds, the highest bid that received was $1500 pounds, which led the publication to conclude “As an eight-year investment the diamonds that we bought have proved to be very poor.” In 1976, the Dutch Consumer Association also attempted to test the price appreciation of diamonds. They bought a perfect, over-one carat diamond in Amsterdam, held it for eight months, and then offered it for sale to the twenty leading dealers in Amsterdam. Nineteen refused to purchase it, and the twentieth dealer offered only a fraction of the purchase price. In 1972, financial speculators in California had a very expensive lesson in the value of diamonds. In January, the West Coast Commodity Exchange began trading diamond contracts. Each contract contained twenty carats of cut and polished diamonds that were certified by diamond appraisers to be in flawless condition. On the first day of trading, speculators, assuming that the value of diamonds would increase with inflation, paid $660 a carat for the diamonds, or $13,200 per contract. Immediately thereafter, diamond dealers began selling contracts on the exchange, and the price plummeted down to the limit allowed by the exchange for the next six days. The following week, the price was down more than 40 percent. The diamond dealers, who had offered the packets for sale at more than $600 a carat, made a vast profit within days on the falling prices. The speculators, who could not afford to keep putting up cash to meet the collapsing prices, lost everything. By the end of the second week, the West Coast Exchange ended trading in diamond futures. The value of diamonds, it turned out, could not be established through an open market. Even among experts, the valuation of a diamond depends on highly subjective criteria. In 1979, for example, New York Diamond Club president William Goldberg, the president of the in New York City, was offered a six carat diamond in my presence by a reputable New York dealer. Both Goldberg and the dealer agreed that the diamond had excellent clarity, with no defects visible under a ten power magnifying glass, a highly desirable blue-white color, and had been expertly cut. The only disagreement was, in fact, over the price of the diamond. The dealer believed it was worth $24,000,. Goldberg, after consulting another dealer, believed it was not worth $8,000. The value was in the eye of the beholder ultimately. Selling diamonds can also be particularly frustrating for individuals. One wealthy woman living in New York city decided to sell back a diamond ring that she had bought from Tiffany two years earlier for $100,000, and use the proceeds to buy 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 with whom she dealt explained, with 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 jewelry store. The woman went from one leading jeweler to another, trying to sell her diamond. One store offered her the opportunity 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 that day offered her cash for her $100,000 diamond. She finally gave up and kept it. Retail jewelers generally prefer not to buy back diamonds from customers because the offer they would make most likely would be considered ridiculously low. The “keystone,” or markup, on a diamond and setting may range from 100 to 200 percent, depending on the policy of the store. If they bought diamonds back from customers, they would have to buy them back at the wholesale price. Most jewelers would prefer not make a customer an offer that not only might be deemed insulting but would also undercut the widely-held notion that diamonds hold their value. Moreover, since retailers generally receive their diamonds from wholesalers on consignment and need not pay for them until they are sold, they would not readily risk their own cash to buy diamonds from customers. Rather than offer customers a fraction of what they paid for diamonds, retail jewelers usually recommend their clients to other firms One frequently recommended is Empire Diamonds, on the 66th 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 name to be called. One by one, they are ushered into a small examining room where an appraiser scrutinizes their diamonds and makes a cash offer. “We usually can’t pay more than 60 percent of the current wholesale price,” Jack Braud, the president of Empire Diamonds, explained. “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 between the wholesale and retail levels, individuals who buy retail and, ;n effect, sell wholesale often suffer enormous losses on the transaction. For example, Braud estimated that a half-carat diamond ring that might cost $2,000 at a retail jewelry store could only be sold for $600 at Empire. The appraisers at Empire Diamonds examine thousands Of diamonds a month but only rarely turn up a diamond of extraordinary quality. Almost all the diamonds found in Jewelry are slightly flawed, off-color, commercial-grade diamonds. The chief appraiser explained, “When most of these diamonds were purchased, American women were concerned with the size of the diamond, not its intrinsic quality.” He pointed out that the flaws were commonly concealed by the setting, and added, “The sort of flawless, investment-grade diamond one reads about is almost never found in jewelry.” Many of the elderly women who bring their Jewelry to Empire Diamonds and other buying services have been the recent 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, for instance, they are asked to wait in the reception room, and the police are called in. In 1980, for example, a disheveled youth came into Empire with a bag full of jewelry that he called “family heirlooms.” When Brand pointed out that a few pieces were imitations, the young man casually tossed them in the wastepaper basket. Braud buzzed for the police. When thieves bring diamonds to underworld fences, they usually get a pittance for them. In 1979, for example, New York City police recovered stolen diamonds with an insured value Of $50,000 that had been sold to a fence for only $200. According to the assistant district attorney that handled this particular case, the fence was unable to dispose of the diamonds on 47th Street, and was eventually turned in by one of the diamond dealers whom he had contacted. While those who actually attempt to sell diamonds often experience disappointment at the low price they are offered, the stories circulated in the press by N. W. Ayer continue to suggest that diamonds are resold at enormous profits. Consider, the legend created around the so-called “Elizabeth Taylor” diamond. This pear-shaped diamond, which weighed 69.42 carats after it had been cut and polished, was the fifty-sixth largest diamond in the world, and one of the few large cut diamonds in private hands. Except for the fact that it was a diamond, it had little in common with the millions of small stones that are mass-marketed each year in engagement rings and other jewelry. When Harry Winston originally bought the diamond from De Beers, it weighed over 100 carats. Winston had it cut into a fifty-eight-faceted jewel, which he sold in 1967 to Harriet Annenberg Ames, the daughter of publisher Moses Annenberg, for $500,000. Mrs. Ames found it, however, extremely costly to maintain: the insurance premium just for keeping it in her safe was $30,000 a year. After keeping it for two years, she decided to resell it and brought it back to Harry Winston. Winston advised Mrs. Ames that he could not buy it back for the price for which she had purchased it from him. She then called Ward Landrigan, the head of Parke-Bernet’s jewelry department, and explained that because she did not want any publicity, the diamond should be auctioned without her family’s name attached to it. This caveat gave the publicist that Parke-Bernet retained for the auction the idea for a brilliant gambit. The huge diamond, which would appear on the cover of the catalogue, would be called “The No Name Diamond,” and the buyer would have the right to re-christen it. In August of 1969, Ward Landrigan brought the diamond to Elizabeth Taylor’s chalet in Gstaad, Switzerland, and assured her that it was the finest diamond then available on the market. She expressed interest in it, and shortly thereafter items were planted in gossip columns suggesting that Elizabeth Taylor planned to bid up to a million dollars for the No Name Diamond. At that point, Robert H. Kenmore, whose conglomerate had just acquired Cartier in New York, saw the possibility of gaining considerable publicity for Cartier by buying the No Name Diamond, renaming it the Cartier Diamond and reselling it to Elizabeth Taylor. He preferred to pay a million dollars for it, so that the sale would be indelibly impressed on the public’s mind as the most expensive diamond ever purchased. He arranged to borrow the million dollars from a bank, and took the $60,000 interest cost on the loan out of his conglomerate’s public relations budget. The auction was held on October 2 3, 1969, and after sixty seconds of excited bidding, the diamond was sold to Cartier for $1,050,000. Harriet Ames received from Parke-Bernet, after paying their commission and sales tax, $868,600, and Cartier received the diamond. Four days later, Elizabeth Taylor and her husband, Richard Burton, bought the diamond from Cartier for $1,100,000 (which meant that Cartier took a slight loss on the interest charge), and a few days later the diamond was transferred to Elizabeth Taylor’s representative on an international airliner flying over the Mediterranean to avoid any further sales tax on the diamond. Some ten years later, when she was married to John Warner, the United States senator from Virginia, Elizabeth Taylor decided to sell this well-publicized diamond. She announced that the minimum price was four million dollars, and to cover the insurance costs for showing it to prospective buyers, she further asked to be paid $2,000 for each viewing of the diamond. At this price, however, there were no buyers. Finally in 1980 she agreed to sell the diamond for a reported $2 million to a New York diamond dealer named Henry Lambert who, in turn, planned to sell the stone to an Arabian client. The profit Miss Taylor received from the transaction, after paying sales taxes and other charges, was barely enough to cover the eleven years of insurance premiums on it. Most knowledgeable diamond dealers believe that the value of extraordinarily large diamonds, such as the one bought and sold by Elizabeth Taylor, depends more on cunning publicity than the intrinsic quality of the stone. An extreme example of this is the seventy-carat diamond given to the Emperor Bokassa in 1977 by Albert Jolis, the president of Diamond Distributors, Inc. The Jolis family first negotiated a concession to mine diamonds in 1947 in what was then the French colony of Ubangi. Jolis’s father, Jac Jolis, had made the case to the State Department that an American company should have the mining rights for diamonds in French Central Africa, thus ensuring the United States a supply of industrial diamonds. He even hired William Donovan, the wartime head of the OSS, to represent his firm in the negotiations. According to a declassified memorandum from the American embassy in Paris, State Department officials were persuaded that it was important for the United States to gain “direct access to strategic materials such as industrial diamonds.” Eventually, with the assistance of Donovan, Jolis’s firm gained control over the alluvial deposits of diamonds in Ubangi. In 1966, Bokassa, then a colonel in the provisional gendarmes, seized power in a military coup d’etat and proclaimed himself president of what was then the Central African Republic. President Bokassa agreed to continue the Jolis concession in return for the government receiving a share of a profit. A decade later, however, when Bokassa decided to become emperor and re-christened the country the Central African Empire, Jolis was given to understand that he was expected to provide a “very large diamond” for the coronation. As the coronation date approached, Jolis found himself caught in a difficult situation. His firm could not afford to spend millions of dollars to acquire the sort of supervised diamond that would put the emperor-to-be in a league with the shah of Iran or the British royal family; yet if he presented him with a small diamond, Bokassa might well withdraw his firm’s diamond concessions. Finally, Jolis hit upon a possible solution to this dilemma. One of his assistants had found a large chunk of industrial diamond boart, weighing nearly seventy carats, which curiously resembled Africa in shape. This piece of black, poorly crystallized diamond would ordinarily have been crushed into abrasive powder, and as such would have been worth about $2 a carat, or $140. Jolis instead ordered that this large diamond be polished and mounted on a large ring. He then had one of his workmen set a one-quarter carat white diamond at the point in the black stone that would coincide with the location of the capital of the Central African Empire. Finally, Jolis placed the ring in a presentation box with a certificate staring that this diamond, which resembled the continent of Africa, was unique in all the world. The following week, though understandably nervous about how it would be received by the mercurial Bokassa, Jolis flew to the Central African capital of Bangui and presented the ring. Bokassa took it out of the box, examined it carefully for a moment, and took Jolis by the hand and led him into a room where his entire cabinet was assembled. He paraded around the table, jubilantly displaying to each and every one of his ministers this huge black diamond. He proudly slipped it onto his ring finger. Jolis’s mining concession was secure, at least temporarily secure in the Central African Empire. A few days later, the emperor proudly wore the black diamond during the coronation ceremony. The world press reported that this seventy-carat diamond, which had cost Jolis less than $500, was worth over $500,000. A piece of industrial boart was thus elevated to being one of the most celebrated crown jewels in the world. When the Emperor of Central Africa met Giscard D’Estaing, the president of France, he extended his black diamond to him as proof of his royalty. The Bokassa empire ended in 1979 when French paratroopers, on orders from Paris, staged a bloodless coup d’etat and put the former emperor and his retinue on a jet headed for France. From there, Bokassa went into exile on the Ivory Coast with his prize diamond ring.& When Jolis heard that he retained among his crown Jewels the industrial diamond he had presented him two years earlier, he commented, “It’s a priceless diamond as long as he doesn’t try to sell it.” The value of the Emperor’s diamond, like that of most other diamonds, depends heavily on the perception of the buyer. If it is accepted as a unique gem and a crown jewel, it could be auctioned off for a million dollars. If, on the other hand, it is seen as a piece of industrial boart, it will be sold for $140 and used as grinding powder. It is, as Jolis observed, “a two-tier market.” CHAPTER TWENTY-ONE CAVEAT EMPTOR  In 1977, in Los Angeles, a film producer, who had just closed his account with his stockbroker, received an unexpected call from a stranger with a distinct English accent. The caller, identifying himself as a representative of “De Beers Diamond Investments, Ltd.,” began by commending the producer on his acumen in withdrawing from the stock market. “You obviously are aware of the fact that stocks and bonds can’t keep pace with inflation,” he continued in a soft voice, “but have you considered diamonds as an alternative?” He explained that diamonds had appreciated “700 percent over the last ten years,” and that they were the “most prudent investment available, since the supply is tightly controlled by a private monopoly.” Without further ado, the caller offered to sell the film producer a selection of “investment diamonds” for $5,000. “But how can I buy diamonds over the phone,” the producer asked incredulously. “All the diamonds are sealed in plastic with a certificate guaranteeing their quality,” the caller responded. “And of course you have heard of De Beers.” The more hesitant the producer became, the more determined the caller became. “We can register these diamonds under your wife’s name, which might be helpful for your taxes,” the caller went on. “Think of how surprised she will be when the diamonds arrive … and you are buying them below wholesale.” The caller, it turned out, was one of dozens of salesmen seated around a bank of telephones in Scottsdale, Arizona. Like the rest of the men in this boiler room, as it was called, he was making a pitch to sell diamonds and had been supplied with a list of names of individuals around the country who had recently closed brokerage accounts. For every order he sold, he received a commission of up 20 percent. Since the prices were in reality far above wholesale prices, the company could afford to pay its salesmen, most of them “telephone pros,” large commissions. And despite the similarity of its name, De Beers Diamond Investments, Ltd., was in no way connected with De Beers Consolidated Mines. Like a host of other recently formed diamond boiler rooms, with names like Diamond Selection, Ltd., Kimberlite Diamond Resource Company, and Tel-Aviv Diamond Investments, Ltd., this firm was formed to promote “investment diamonds.” When the mail-order diamonds finally arrive at the purchaser’s home, they are sealed in plastic with the certificate guaranteeing their quality. The customer is then advised of what amounts to a catch-22 situation: The quality of the diamond is only guaranteed as long as it remains sealed in plastic; if the customer takes it out of the plastic to have it independently appraised, the certificate is no longer valid. When customers broke the seal, many found diamonds of inferior or even worthless quality. Complaints to the authorities proliferated at such a rate in New York that the attorney general was forced to mobilize a “Diamond Task Force” to process the hundreds of allegations of fraud. “It is incredible,” William R. Ralkin, the assistant attorney general said in the New York Times in 1979. “These crooks will get outwardly rational people to buy a sealed bag containing supposed gems. . . . And they have the nerve to tell their victims not to unseal the packet for two to three years, after which they promise to buy back the stones it much higher prices.” He added, “It never falls to amaze mc me how . . . professional people like lawyers [and] medical practitioners will send checks for thousands of dollars to people they never met or heard of after being contacted by these boiler room operators.” Aside from selling tens of thousands of diamonds a month over the telephone, many of these newly created firms hold “diamond investment seminars” in expensive resort hotels. At such events, they present impressive graphs and data, and typically assisted by a few well-rehearsed shills in the audience, they proceed to sell sealed packets of diamonds to the audience. (Not uncommonly, in dealing with elderly investors, diamond salesmen play on the fear that their relatives might try to seize their cash assets and have them committed to nursing homes. They suggest that the investors can stymie such attempts by putting their money in diamonds and hiding them. Some of these entrepreneurs were relative newcomers to the diamond business. Rayburne Martin, who went from De Beers Diamond Investments, Ltd., to Tel-Aviv Diamond Investments, Ltd., both domiciled in Scottsdale, Arizona, had a record of embezzlement and security 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 he had been involved in a silver bullion caper in 1974 before he helped organize De Beers Diamond Investments, Ltd. Don Jay Shure, who arranged to set up another De Beers 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 President Richard M. Nixon, and Robert L. Vesco, the fugitive financier, were, according to the New York State attorney general, allegedly participating in a high-pressure telephone campaign to sell “over-valued 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. Meanwhile, in London, the real De Beers, unable to stifle all the bogus entrepreneurs in Arizona and California 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 “buyback” guarantees, promotion material, and training in how to sell these unmounted diamonds to an entirely new category of customers. The target was defined by De Beers as “men aged 55 and over with inherited or self-made wealth to spend.” Rather than sell fine jewels, as they were accustomed to, these selected retailers would sell loose stones with a certificate for $4,000 to $6,000. De Beers’ modest move into the investment diamond business caused a tremor of concern in the trade. De Beers had strongly opposed retailers selling “investment” diamonds on the grounds that because there was no sentimental attachment to such diamonds customers would eventually attempt to resell them and thereby cause sharp price fluctuations. Indeed, De Beers executives expressed concern that retailers would not be able to cope with the thousands of distressed investors who tried to resell their loose diamonds back to them. In response to this new “diamond fellowship” scheme, the authoritative trade journal, jewelers’ Circular Keystone, observed: “Besides giving De Beers an unusually direct role in retail diamond sales, the program marks a softening of its previous hard-line stand against gem investing. Eric Bruton, the publisher of Retail Jeweler in London, added, “De Beers is standing on the edge of a very slippery slope…. They say it is unwise to sell diamonds directly as an investment, then [they] go ahead with this diamond investment scheme.” 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. Its marketing executives in London realized that speculators could panic at any moment, and by precipitously flooding the market with diamonds they had hoarded, burst the price structure for diamonds. They had, however, “little choice but to get involved,” as one De Beers executive explained. Even though the “De Beers Diamond Investments” in Arizona, which had pioneered in selling diamonds over the telephone, had gone bankrupt, ‘ more than 200 firms had by then entered the business of selling sealed packets of diamonds to the American public over the phone. And aside from these proliferating boiler rooms, many established diamond dealers rushed into the field to sell diamonds to financial institutions, pension plans and serious 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 dealers in New York, estimated that in terms of dollar value, nearly one third of all diamond sales in the United States were for investment diamonds. “Only five years earlier, investment diamonds were only an insignificant part of the business,” he added. Even if De Beers did not approve of this new market in diamonds, it could hardly ignore one-third of the American diamond trade. It had to take some action. Mass-marketed investment diamonds was made possible in the 1970s by the invention of the diamond certificate. Diamonds themselves cannot be valued by any single measure, such as weight, and the factors involved in such an assessment-clarity, color, and cut-cannot be made by an individual investor or financial institution. Moreover, since diamonds are not fungible in the sense that one diamond can be exchanged for another diamond of the same weight, some means had to be found of standardizing the quality of diamonds. Certificates, which guaranteed the color, clarity and cut of individual diamonds, provided this medium. The Gemological Institute of America, a privately owned company established to service jewelers, developed a convenient system for certifying the quality of diamonds. For ascertaining the “cut” of the diamond, the Gemological Institute devised in 1967 a “proportion scope.” This contraption casts a magnified shadow of the stone in question over a diagram that represents the ideal proportions for a diamond of that size. By comparing the overlap between the image of the diamond and the diagram, the deviation from the ideal can be easily measured-and recorded on the certificate. For determining the “clarity” of the diamond, the Gemological Institute developed a “Gemolite” microscope, which has an attachment for rotating a diamond under ten power magnification against a dark background. If no blemishes can be seen in the diamond under this magnification, it is graded “flawless”; if there are blemishes, but they are very difficult to find with this lens, it is graded “VVS,” and with imperfections visible at lower magnifications, it is further downgraded. Finally, to establish the exact color of the diamond, the Gemological Institute introduced the “Diamondlite”: a boxlike machine with a window in it which allows a diamond to be compared with a set of sample stones that span all the color gradations from pure white to yellow. The purest white on this scale is classified as “D”; the next grade of white is classified as “E.” Gradually, by grade “l,” the white is tinted with yellow; and by grade K,” the color is considered to be yellow and of much lower value. By 1978, diamonds were being routinely certified through these methods, not only by the Gemological Institute of America, but also by other Gemological laboratories in Antwerp, Paris, London and Los Angeles. Since dealers needed certificates for selling investment diamonds, and customers were usually willing to pay a hefty premium for such a document attached to the diamond, the laboratories found it difficult to keep up with the demand. Long lines of diamond dealers usually formed in front of the laboratories, and in many cases, stand-ins were hired to wait in line for impatient dealers. The certification mechanism, despite all the Rube Goldberg sorts of inventions employed, did not entirely remove the subjective element from diamond evaluation. Not uncommonly, dealers would resubmit the same diamond to the Gemological Institute and receive a different rating for it. It did, however, facilitate the trading of rare diamonds. A diamond certified as D, flawless, was an extreme rarity, and since very few such stones existed, or would ever be extracted from mines, they could be bought and sold on the basis that they were in short supply. The price of these near-perfect diamonds rose from $4,000 a carat in 1967 to $22,000 to $50,000 in 1980. Even though such extravagant prices for D, flawless, diamonds are frequently cited by the press in stories about the appreciation of diamonds, they are atypical of diamond prices. In all the world, there are probably less than one hundred diamonds mined that can be cut into one carat, D, flawless, stones, and only a small proportion of these ever are certified and sold to investors. Moreover, very few diamonds are ever sold for the prices reported in the news stories. “No dealer I know has ever sold a one-carat investment diamond for $50,000,” a New York dealer commented. The high prices quoted for the few available D, flawless, stones do not necessarily hold for diamonds of an even slightly inferior grade. For example, in 1978, when D, flawless, diamonds were quoted at $22,000 a carat, an H grade white diamond, without any visible imperfections, was valued at only $2,750- Once mounted in a ring or piece of jewelry, it would be extremely difficult for the untrained eye to differentiate between a D and H color (especially since the setting reflects through the diamond). But while this subtle difference makes little difference in the sale of jewelry, it creates nearly 90 percent of the value in an investment diamond. For what is measured by this grading system is not beauty, but the comparative rarity of a given class of diamonds. Most investors have no choice but to rely on the piece of paper that comes attached to the diamond to specify the grade, and hence the value, of their investment. Not all the certificates, however, emanate from the Gemological Ins Institute of America. Many certificates have been issued by less reputable-or even nonexistent-laboratories, and the diamonds might be of a much lower grade than that certified. Even if the certificate comes from a bona fide laboratory, its evaluation of the diamond may later be disputed by another assessor. Robert Crowningshield, the New York director of the Gemological Institute, observed, “. . . I’ve never seen two experts agree on the quality of a particular diamond.” The extent to which the value of diamonds is determined by the eye of the beholder was demonstrated in 1981 by an experiment conducted under the sponsorship of Goldsmith magazine. In this test, four leading diamond evaluators were handed 145 diamonds that had previously been graded by the Gemological Institute of America, the European Gemological Laboratories and the International Gemological Institute. The team of experts was not told how each of the diamonds previously had been graded. After the team had reached its own consensus on the grade of each stone, the results were compared with those of the Gemological institutes. In 92 Out Of 145 cases, the team of evaluators disagreed with the grades previously given on the certificates. Despite all the scientific paraphernalia surrounding the process of certification, diamond grading remained, according to this test, an extraordinarily subjective business. To make a profit, investors at some point must 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 on which to sell diamonds. Although dealers will quote the prices for which they are willing to sell investment-grade diamonds, they seldom give a set price at which they are willing to buy the same grade diamonds. In 1977, for example, Jewelers’ Circular Keystone polled a large number of retail dealers and found a difference of 100 percent between different offers for the same quality 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 tends to be at least 100 percent in investment diamonds, any gain from the appreciation of the diamonds will probably be lost in the act of selling them. Many New York dealers feared that despite the high pressure telephone techniques, the diamond bubble could suddenly burst. “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 strong boxes, or wherever, and try to sell them,” one dealer predicted. The principal ingredient in the Diamond boom is expectations that may not be fulfilled.  CHAPTER TWENTY-TWO  THE GREAT OVERHANG 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. END NOTES CHAPTER 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 Richard 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. CHAPTER NINE The question of how nations at war acquire the strategic materials they need from their enemies remains an especially difficult one to research. Throughout the Second World War, Germany was entirely dependent for its supply of industrial diamonds on its British enemy. There were no synthetic diamonds in those days, and the only source for many important types of diamonds were the mines and fields in the British Empire under the control of the diamond cartel. Despite embargoes and intensive policing by intelligence services, Hitler managed to acquire his diamonds. The source of research for this chapter is a document I acquired under a Freedom of Information request. I had initially learned of the United States government’s interest in the strategic smuggling of diamonds through a former attorney general named Bruno Schachner. When he had originally joined the Justice Department in 1939, he had been assigned to one of the least interesting tasks it had to offer: investigating private competition to the United States postal service. If such a case was brought against any offender, the maximum fine was fifty dollars. For months he labored in the legal doldrums, searching for an escape. Then, early in 1940, the Coast Guard arrested a German soldier whom they suspected of being a spy. The only grounds that could be found for detaining him was that he was carrying a letter, and this could be construed as violating the prohibition against competing with the post office. Schachner found that the letter the German sailor was carrying was encoded. Calling in a team of code-breakers from the Treasury Department, Schachner set about deciphering it. The message concerned a shipment of gem diamonds consigned to a firm in New York. The diamonds, moreover, came from European areas that had been recently overrun in the Nazi blitzkrieg. Schachner, himself a refugee from the Nazi pogroms in Austria, suspected that these diamonds had been seized from interned Jewish diamond cutters. For this reason he took “a very personal interest in the case.” He began his investigation by visiting the various diamond cutting factories in New York and learning the style or “signature” of the different diamond cutters. It turned out that the diamonds that the firm in question was importing had the “signature” of Dutch and Belgian cutters who had been shipped off to concentration camps by the Nazis. Schachner then began tracing the provenance of these diamonds through import licenses and records of money transfer. By 1941, he had established that they had all come from Germany. As a result of this investigation, an owner of the import firm was prosecuted for trafficking in stolen diamonds and sent to prison. Schachner had further learned that the Nazis were involved in a triangular diamond trade whereby the records of the diamonds sold in New York were used to buy industrial diamonds in Brazil, which, in turn, were shipped to Germany through Switzerland. The category of industrial diamonds that the Germans seemed most interested in was boart (which is a form of powdered diamond dust used for diamond grinding wheels). Even as early as 1941, Germany had a critical shortage of this boart. Since Schachner recalled being consulted during this period about the status of the De Beers stockpile in London, by the FBI and Justice Department officials, he suggested that somewhere in the justice Department archives there existed a file on the diamond investigation. I called an assistant attorney general at the Justice Department who told me that most of the government’s files on the diamond monopoly were in the antitrust dossier on De Beers, and suggested that I file a request under the Freedom of Information Act for the entire antitrust action against the diamond monopoly. Within a matter of weeks, batches of formerly classified files began arriving. They soon totaled more than 2,000 pages of legal memoranda, FBI reports, embassy cablegrams, intelligence briefings, economic analyses, financial records, interviews with individuals in the diamond industry, and mail intercepts of correspondence between members of the diamond cartel, including Otto Oppenheimer (which were apparently read by military censors in Bermuda). The file obtained under Freedom of Information contained only a few references to any actual investigation of the smuggling of diamonds by the cartel to the Nazis. There was, however, one reference to an OSS investigation. This led to the summer report, cited in the chapter, which strongly implied that De Beers was impeding Allied intelligence investigations-if not actually engaged in smuggling itself. To find the field reports I went to the National Archives and consulted the military historian, John E. Taylor. Without access to these field reports, it was not possible to assess the quality of evidence on which the OSS predicated its almost incredible charge that the diamond syndicate dealt with the enemy. In an attempt to find agent Teton, I placed advertisements in the journal of the retired officers of the OSS and the New York Times Book Review, but I had no success. The letters on the Belgian Congo cited in this chapter came from Sir Theodore Gregory’s book on Oppenheimer, previously cited. CHAPTER TEN The description of the cartel’s attempt to suppress the production of South American diamonds, cited in this chapter, comes from the autobiography of Sir Patrick Hastings, Cases in Court, Pan Books, London (1949), especially part three, “A Case for the Diamond Syndicate.” Sir Patrick had the unusual opportunity to cross-examine Otto Oppenheimer and to take testimony in pretrial motions. The section on John Thornburn Williamson is drawn from a two-part series in Indiaqua magazine (9:10-21 and 10:15-17) which provides a biography. The material on the British Colonial Office comes from the public record and documents obtained under the Freedom of Information Act. Financial details are given in Edward Jessup’s book,, previously cited. Ronald Winston, whose father Harry Winston dealt with Williamson, also provided personal recollections of Williamson. At one point Harry Winston had contemplated taking over Williamson’s mine, and negotiated with him, but decided against it out of concern for jeopardizing his relations with De Beers. The section on Harry Winston comes from interviews with Ronald Winston, now president of Harry Winston Inc., and Nick Axelrod, the chief diamond buyer for Harry Winston Inc. CHAPTER ELEVEN The International Diamond Annual, a review of the world’s diamond industry and trade, published by De Beers in two volumes in 1971 and 1972, furnishes a comprehensive picture of a diamond pipeline from the diamond mines to the cutting center to the retail business. They were published by De Beers as a service to the diamond industry. The quotation about keeping track of the market in this chapter comes from volume two of these books. Other trade publications, including Indiaqua, Jewelers’ Circular Keystone and Diamant, illuminate the diamond trade. I was shown around Antwerp by Ivor Sanders, who flew over from London to take me to various diamond cutters. Most of the diamond dealers I visited, therefore, had a close relationship with De Beers. Raoul Delveaux, the director general of the Diamond High Council in Antwerp, was also helpful in arranging interviews in Antwerp. The history provided in this chapter is drawn in part from the 1978 Year Book of the Diamond High Council. In Israel, I was assisted in making contact with diamond dealers by James J. Angleton, the former CIA counterintelligence chief, who had served as a liaison between American and Israeli intelligence. I met Angleton in the course of researching my book, Legend: The Secret World of Lee Harvey Oswald, and he put me in touch with a number of his contacts in Israel. During a week in Tel Aviv, I was able to see independent diamond dealers, diamond dealers with a sight at De Beers in London, former diamond smugglers, diamond bankers and even diamond speculators. They all shared a conspiratorial view of De Beers. They believed that De Beers was artificially restricting the flow of diamonds, both by stockpiling diamonds in their vault in London and by manipulating the open market so as to drive up the price. Most of these dealers and individuals in the diamond business also believed that the De Beers cartel was attempting to undercut Israel’s preeminent position in the business of cutting small diamonds. CHAPTER TWELVE The letters cited in this chapter come from Sir Theodore Gregory’s biography of Sir Ernest Oppenheimer. Oppenheimer filled in some of the gaps and motivations in an interview he gave me on September 4, 1978. Before I was ushered into his office that morning, I had viewed a video tape of a special hour-long documentary about Oppenheimer that had been prepared by South African television to commemorate his seventieth birthday. Throughout this televised interview, Oppenheimer was treated with the sort of somber respect reserved for the most exalted royalty. In hushed tones he was asked about the economy, the nation and the state of the world. This program was then followed on videotape by a second program, called “A Family Affair,” that showed various aspects of Harry Oppenheimer’s personal life. There were scenes of his arriving in Johannesburg in his own blue and white Gulf Stream jet, followed by his aide-de-camp and security police. Other scenes showed him at his palatial home, surrounded by his Goya paintings and greyhound dogs. There were also scenes of Oppenheimer at his stud farm outside of Kimberley with his championship racehorses. Aside from Oppenheimer, I also gained some insight into how he operated from his executives, whom he had treated as members of “one big family” as one of them put it. For example, Richard Wake-Walker, a young executive with the Diamond Trading Company in London, told me how he had been invited to Oppenheimer’s game farm during weekends in South Africa. He recalled that Harry Oppenheimer would sit in his shirt sleeves on the terrace surrounded by various members of his family, executives of Anglo American and De Beers and a few friends. Everyone would drink beer. When an elephant or a rhinoceros would trudge up to the barrier in front of the terrace, a servant would throw a floodlight on it, and everyone would admire the wildlife. Kees Schager of the investment firm of Arnhold and Bleichroeder helped me through the corporate labyrinth of the Anglo-American and De Beers. The antitrust documents obtained by me under the Freedom of Information Act provided further clues to the interrelations. I also received some help from the Anglo-American corporation. CHAPTER THIRTEEN I got files of the N. W. Ayer Company, the advertising campaign for De Beers. From my Freedom of Information request. Prosecutors in the antitrust division, attempting to show that De Beers had an agent in the United States, had subpoenaed all of the Ayer records. These archives contained the material reviewing the strategy research and ambitions of De Beers. N.W Ayer provided me with volumes of campaign books. These included not only the advertisements used by N. W. Ayer in its campaign, but also the strategy it presented to De Beers. I also interviewed a number of executives at the advertising agency who preferred not to use their names. CHAPTER FOURTEEN Ian Fleming, who invented James Bond, also wrote probably the best book on diamond smuggling, The Diamond Smugglers, Cape, London (1957). He had extensive interviews with Percy Sillitoe’s staff, who set up De Beers’ intelligence system, and considerable access to De Beers itself. It is his only nonfiction book. Fred Kamil, the Lebanese mercenary who hijacked a South African aircraft in order to extort money from Harry Oppenheimer, has also written a book about smuggling called The Diamond Underworld, Allen Lane, London (1979), which is of great interest since Kamil was one of De Beers’ diamond soldiers. The section in this chapter on Percy Sillitoe and the organization of De Beers intelligence is drawn mainly from Fleming’s account. The section on Kamil is drawn mainly from his autobiographical book. The section on Sierra Leone is based on interviews I conducted with Maurice Tempelsman, Ronald Winston and Michael Samuels, the former American ambassador to Sierra Leone. The section on Zaire is based on personal interviews with a former CIA officer stationed in Zaire who prefers that his name not be used. Other sources include New York diamond dealers who do business in Zaire. The section on Angola is based on interviews with Albert Jolis, a New York diamond dealer. CHAPTER FIFTEEN The story about Sir Ernest Oppenheimer rejecting the proposal to develop synthetic diamonds was told by Richard Hambro, an investment banker who worked in the industrial division of De Beers in South Africa. The section on General Electric is partly based on documents I obtained under the Freedom of Information Act. In its 1973 lawsuit, the Department of justice looked into the possibility that De Beers had conspired with General Electric to fix the price of synthetic diamonds. The prosecutors found no substantive evidence of such collaboration, but the documents they turned up in their search provide a useful overview of the economic and political considerations involved in General Electric’s development of synthetic diamonds. CHAPTER SIXTEEN The section on the origins of the Israeli diamond industry comes from interviews I had with Ovi Ben Ami while I was in Israel in 1978 and Vivian Prins, whose father had been the broker for Ben Ami in the Israeli diamond deals. The section on Goldfinger is based on my interview with Israeli dealers who had known his work before his death. Vivian Prins, whose firm had brokered diamonds for Goldfinger, provided details about the dealings between Goldfinger and De Beers. CHAPTER SEVENTEEN In Kimberley I was seated at lunch at the Kimberley Club next to Barry Hawthorne, a geologist who works for De Beers. He had recently returned from the Soviet Union, and told me about the enigma of Soviet diamond production. The section on the history of Soviet production is drawn from the Industrial Diamond Annual (1971, 1972) and Indiaqua ( issue 5, pp. 1416; . 6, p. 15; 11, p. 18;. 15, pp. 8-1 1 and 16, P. 20) and John Massey Stewart account in the magazine Optima, which is published by the Anglo-American Corporation (No. 2, 1976, p. 8). The section on Aikhal comes from”Red diamonds from Siberia.” in the International Diamond Annual 1971 (p. 79) as does the quotes from Victor Tikhonov. The data on the Finch mine was provided by L. G. Murray. The description of the diamond sorting was given to me by a former diamond sorter for the Diamond Trading Company in London who prefers that her identity be kept secret. The section describing Sir Philip’s trip to the Siberian mines comes from Barry Hawthorne in 1978. Dr. Henry Meyer provided the account of the Soviet synthetic diamonds in an interview I had with him in New York in 1980. Joseph Bonroy gave his account of Soviet synthetic diamonds in the Belgian trade magazine Diamant (November 1970 The section on the silver bears is based on interviews I had with dealers in Antwerp . CHAPTER EIGHTEEN This chapter is drawn almost entirely from the documents I obtained under the Freedom of Information Act and interviews with prosecutors involved with the case. The biographical details on E. T. S. Brown are derived from an interview with him in Indiaqua (1980) p 55. CHAPTER NINETEEN The section on Sam Collins is based on interviews I had with Francois Lamparetti, a geologist who worked for the Marine Diamond Corporation. Background information concerning the attempt to smuggle diamonds from the forbidden zone comes from Ian Fleming’s The Diamond Smugglers and Indiaqua (nos. 12 and 13). The account of Collins’ organization of his marine diamond. Indiaqua, no. 6 . The section on Albert Jolis is drawn mainly from interviews I had with him in New York.. He appeared before the grand jury investigating the diamond cartel in 1975, and the reference to his dealings in the Central African Empire come from documents I obtained under Freedom of Information. I also discussed the story about the Angolan concession with Chipanda, the former minister of natural resources for Angola, who confirmed Jolis’s story. The section on Harry Winston is based mainly on interviews with his son Ronald Winston, and Nick Axelrod. CHAPTER TWENTY The section on Stanley Mark Rifkin is based on interviews with executives of the Security Pacific National Bank in Los Angeles. The investigations of the Dutch Consumer Association and the London magazine, Money Which? were reported in the gemstone section of the Jewelers’ Circular Keystone magazine in January 1977. Susan Rosenberg, who was commissioned by the exchange to study diamond trading, provided me with the data and documents involved in the earlier failure. William Goldberg, the president of the New York Diamond Club, allowed me to witness a diamond transaction in his office in April 1979 The section on Empire Diamonds comes from interviews in 1980 with Jack Braud, its president, and some of his diamond buyers. Diane Rossant, an assistant district attorney in New York City, provided information about fencing diamonds. The section on Elizabeth Taylor’s diamond is based in part on the article by Kenneth Schwartz Are a Girl’s Best Friend” which appeared in the Washingtonian , January 1980. The section on the Bokassa diamond comes entirely from interviews I had with Albert Jolis. CHAPTER TWENTY-ONE On the subject of investment diamonds, David Birnbaum, a New York diamond dealer who writes on investment diamonds, provided details about the investment diamond business in America and Diana Motmans, a diamond journalist in Antwerp, on the international diamond investment business. CHAPTER TWENTY-TWO The quote from N. W. Ayer comes from the material provided to me under the Freedom of Information Act. The quote from Harry Oppenheimer is taken from a statement Oppenheimer made to Anglo-American shareholders. The section on the Israeli overhang is drawn from David Meadow, “Checkmate,” Jewelers’ Circular Keystone, September 1979 and from interviews with Israeli diamond dealers and bankers. ACKNOWLEDGMENTS This book was originally published by Simon&Schuster in 1982 under the title “The Rise and Fall of Diamonds.” I am indebted to June Eng for designing the cyber book and thank Rebecca Fraser and Marjorie Kaplan for their research assistance.