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On a December day in 1866, a young man named Erasmus Jacobs found a transparent and very shiny stone on his father's farm that was located alongside the Orange River. This turned out to be the first of what would become an avalanche of diamonds from the South African mines, and would start one of the world's greatest monopolies that would last for over 100 years. There were two important events that combined to make this one of the most momentous events in world economic history.
First, it proved to be the greatest find of diamond deposits in the history of the world. According to many sources, the South African mines produced more diamonds in the next 15 years than the Indian deposits had produced in 2,000 years. The African diamond deposits proved to be extremely wide spread, and extremely rich.
The second event was the ending of the Civil War in the United States that ushered in a period of great prosperity and a resultant high demand for diamond jewelry. Plus...with the industrial age just now dawning, the demand for diamonds for industrial purposes was also growing. These were joined with an already healthy diamond market established in Europe. Together they all created a huge demand for diamonds. And many men got on ships of all shapes and sizes heading to the South African diamond fields to make their fortunes.
Until now, the majority of diamonds found were in alluvial deposits. But with the South African diamond discovery, the alluvial deposits could be traced up river until the prime source was found. These were called kimberlite pipes, and were the remnants of ancient volcanoes that had discharged the diamonds from deep inside the earth millions of year earlier. But more on that in a later lesson. For now it will be important for you to know that the South African diamond deposits were traced back to their original source, and now diamonds could be dug from the earth...rather than just washed from a stream bed.
The problem became one of too many people trying to dig too many diamonds out of relatively small places in the ground. The main mining effort was at the Kimberley mine which at the time was the largest diamond mine in the world. Each miner was able to stake a claim measuring 31 feet or 9.44 meters square. And since everyone had different methods of mining encompassing variable numbers of helpers and variable techniques, each claim was worked at different speeds. And different mining speeds meant that the claims dug into the earth at different rates. This allowed some claims to quickly be several meters deeper than the one next to it, allowing for a very dangerous situation as the higher would collapse onto the lower. Clearly something needed to be done to make the mining more uniform, more profitable and less dangerous.
Above and below you see the amazingly convoluted mining operations at the Kimberley Mine before the claims were unified into the DeBeers Consolidated Mining company. These claims were worked at different rates creating a very dangerous situation for the miners.Enter Cecil Rhodes and Barney Barnato.
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These two gentlemen arrived in South Africa in the early 1870s and separately began a process of accumulating claims from other miners in an effort to gain overall control of the Kimberley mine. The concept being that a single unified effort at mining would be more profitable, and bring the control of the distribution of diamonds under a single office. The market could then be better controlled as the supply of diamonds would be controlled by one man rather than a huge number of individual miners.
The ensuing battle between these two men has been the subject of many books, and is a story worthy of your continued research. The fight for control of the Kimberley mine was nasty in size and scope, encompassing many legal battles and bar room brawls. But the necessity of a unified mining effort was further confirmed when the mine reached a particular depth and ground water began flooding vast areas of the mine. Many miners were quick to sell their claims as they believed there was no longer any reason to own that claim. But the truth was that Cecil Rhodes had a plan to pump the water from the deepening claims, thereby making them continue to produce profits far in excess of the bargain prices he had paid the others who had given up on them.
Eventually, Cecil Rhodes won the battle of control of the Kimberley mine and bought out his rival, Barney Barnato, for a price of what would be over US$25,000,000.00 in today's dollars to consolidate the Kimberley mine into single ownership. This was the birth of the De Beers Consolidated Mines Company which exists to this day.
Central Selling Organization
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Of course, for the De Beers Consolidated Mines to have real control of their distribution, it was required that they not have to deal with all of the small time diamond merchants in order to sell their production. So in true form to the legacy of Cecil Rhodes, a unified distribution network was established between De Beers Consolidated Mines in South Africa, and what was known as the Central Selling Organization in London. The CSO, as it was called, was established to serve as the distribution channel for the diamonds, and to help control the market and prices of diamonds. This organization served to control virtually the entire world production of diamonds…since virtually all came from the South African mines owned by De Beers...by withholding rough when prices were low, and selling more rough when prices were higher. This established De Beers as holding a monopoly on the world diamond markets, a matter of great concern to the US government since monopolies are against the law in the USA.
The result was that De Beers could not directly do business in the United States, in spite of the fact that the US had become its biggest customer. The US jewelers were by far the driving force behind the world demand for diamonds, and yet the De Beers organization could not participate in the market. So for many years the De Beers organization paid the US advertising company, N. W. Ayers, to handle their public relations and promotion of diamonds in the United States. In fact, it was N.W. Ayers who come up with the famous De Beer's slogan: A Diamond is Forever.™ With the mines under their control, the distribution under their control, the prices under their control, and the marketing under their control, De Beers finally had a complete and utter monopoly on the world diamond markets. .........And here is where the story turned a bit ugly.
World War II
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With the outbreak of World War II came a world wide demand for many commodities to power the war machines of the Allied and Axis powers. One of these commodities was industrial grade diamonds needed for grinders and cutting blades to speed up production of war machines. And..you guessed it...De Beers controlled the whole world's production of industrial grade diamonds. And since De Beers was only interested in who was willing to pay the most for their products, and not so much on what their customer's politics were, the scramble for industrial grade diamonds put great amounts of profits into the pockets of the De Beers owners regardless of who made the purchase.
Although this did not sit well with the US government, they were relying on the US industrial complex to provide some alternatives to De Beer's strangle hold on this important war time commodity. Enter General Electric.
The General Electric company set about to create the world's first synthetic diamonds. Many other gemstones had been synthesized for many decades. So it was only natural to believe that diamonds could also be synthesized, thereby taking the De Beers monopoly out of the production chain and saving the US government millions of dollars. And the GE company was successful...to a point. Although they were able to synthesize diamonds, they reported that they were not able to do so in the volume and quality required for military and industrial purposes. But this turned out not to be totally true....
What was later found out was that De Beers had actually conspired with GE to keep the new synthetic diamonds off the market so that De Beers would not lose their monopoly. And long after the situation occurred the nature of De Beers involvement was found out, and De Beers was charged with crimes against the United States by way of their monopoly over the diamond markets. For some reason, GE was never really brought to task over this matter, or so it has been reported.
The actual events after the revelation of this situation are still up to interpretation as there are many stories surrounding the issue. But one thing was certain, no officer of the De Beers company could enter into the United States without being immediately arrested. And for many decades the Central Selling Organization had to do business in the US from a distance and through third parties because they could not set foot inside any US property for fear of arrest.
In 2004 De Beers finally pleaded guilty to the price fixing of industry diamonds that dated back to the World War II events and continues until current times. De Beers paid a US$10 million dollar fine and cleared the way to enter into the United States market as a formal business presence. It was during this time that De Beers ceased using the name and structure of the Central Selling Organization and formed the Diamond Trading Company.
It is the DTC that now oversees the sale and distribution of rough diamonds from many world sources. And what about De Beers?
After many decades of making billions of dollars from operating a monopoly of the diamond markets to wholesalers and retail jewelers, De Beers is now going into the retail business in competition with their own clients through their De Beers retail jewelry stores that recently opened in New York and other locations.
Coming Next Week: History of Diamonds Part 3: Conflict Diamonds and Current MarketsTo learn more about the world's finest distance education experience in gemology and jewelry appraisal, please click the link below:
