The Rise and Fall of Diamonds

by Edward Jay Epstein

  With the reduction of diamonds to a mathematic formula, it became possible to devise semi-automatic machines to polish diamonds. In the early 1960s, a De Beers subsidiary introduced the Pieromatic diamond-cutting machines in Antwerp. Although these machines still required trained workers to guide diamonds through the polishing operation, they greatly reduced the need for master craftsmen or even long apprenticeships. According to the literature accompanying the Pieromatic machines, men could be trained to operate them in a matter of months.

  As the diamond business expanded in the postwar years, Sir Ernest Oppenheimer made every effort to keep the cutting industry anchored in Antwerp. Not only was Antwerp just across the channel from England, and highly convenient to De Beers, but Sir Ernest considered it essential to maintain a special relationship with the Belgian government, which controlled the huge diamond deposits in the Congo. Under his express orders, Monty Charles provided the Antwerp diamond cutters with ample supplies of diamonds at the London sights while cutting back on supplies to their competitors.

  Amsterdam, which had been a major diamond cutting center in the nineteenth century, gradually lost almost all its gem cutters to Antwerp. (Strict working conditions imposed on the Dutch diamond-cutting factories by the labor unions greatly accelerated the exodus in the prewar years.) But, despite all of De Beers' efforts, Antwerp did not achieve a monopoly on diamond cutting. The larger and more expensive diamonds were sent to be cut directly to New York, in order to avoid paying the tax on finished jewels, while the smaller diamond chips were sent to India to be polished by cheap labor. The "melees," or medium-sized diamonds, generally under a half carat in weight, tended to flow to Israeli factories. Nevertheless, Antwerp's cutters continued to receive most of the valuable diamonds and virtually all the difficult-shaped diamonds that required special skills.

  To see how these diamonds were cut, I visited the Trau Freres factory in Antwerp. Founded in the nineteenth century, Trau Freres specializes almost exclusively in cutting a triangular-shaped twisted crystal known in the trade as a "macle." As Trau Freres is invited to De Beers' sights in London on a regular basis, it receives all its macles from De Beers. The factory employs about 100 workers, who receive on the average a salary and benefits of $400 a week, which makes them among the highest paid workers in Europe. Each worker was seated in front of a table cutting and polishing an individual macle.

  The diamond I watched being shaped at Trau Freres started out looking like two triangles folded into one another. It took about ten hours for the craftsmen to saw it into its basic shape, which resembled a valentine heart. The heart shaped stone was then placed in a cup-like dop and rubbed against a second diamond in order to wear away the sharp and irregular edges. Finally, the craftsman began polishing the individual facets of the diamond on his whirling scaif. By the time this arduous process was completed, the diamond would have lost at least 40 percent of its original weight. This particular diamond had weighed io carats when Trau Freres received it in their box at the London sight, It cost them $4,000, or $400 per carat. The labor and interest costs on this individual diamond amounted to about $1,000. The final heart-shaped diamond that was cut weighed only 6 carats.

  To break even, Trau Freres would have to sell it to a wholesaler for at least $ 5,000, or $ 837 per carat.

  The thin margin of profit for specialty diamond cutters like Trau Freres depends almost entirely on the price they pay the Diamond Trading Company for the uncut diamonds in their box at the sights. If De Beers elects to raise the price even slightly or to provide them with an inferior selection of diamonds, these specialty cutters would be forced out of business. And according to at least one Antwerp specialty cutter, De Beers still uses its leverage over these cutters to prevent them from cutting diamonds from independent mines. By controlling the activities of these few cutters, De Beers makes it extremely difficult for any independent mine to sell the full range of its diamonds. Rather than forgo the profits from these poorly shaped diamonds, most potential competitors have been forced to sell their entire production to De Beers or one of its many subsidiaries. De Beers thus turned diamond cutting into an important element in its diamond invention.

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  The Corporate Underground

  Harry Oppenheimer was forty-nine years old when he succeeded his father as chairman of both De Beers and the Anglo-American Corporation. A shy, quiet man formerly in the background of the diamond cartel, he was now in sole command of it. It was a position that he had been prepared for all his life.

  Oppenheimer was born on October 28, 1908, in Kimberley, a city literally built on diamond mines. When he was four years old, his father became the first mayor of Kimberley, and was rapidly amassing a major financial interest in the diamond mines. During his childhood, Harry dreamed of other careers. He explained to me, "I first wanted to be an engine driver, then an admiral-nothing less!-in the Royal Navy and then an ambassador." He added wistfully, "However, all these ambitions had to be abandoned before the age of twelve in favor of a business career." He went to Charterhouse School in England, and then was admitted to Christ Church college at Oxford. At Oxford, he took his degree in politics, philosophy and economics. He was at that time most interested in economics and least interested in politics. His tutor for economics was Sir Roy Harrod, the Keynesian economist; his tutor for politics was Sir John Masterman, who later organized Britain's celebrated "double-cross" espionage system against the Germans. Even with such impressive tutors, Oppenheimer enjoyed a carefree time in Oxford. It was perhaps the only truly carefree period in his life. He went on champagne picnics in the Oxfordshire countryside and spent weekends at the Spreadeagle Inn on the Thames (which the novelist Evelyn Waugh once termed "Oxford's only civilizing influence").

  He returned to South Africa in 1929, the year the worldwide Depression began, and went to work at the De Beers sorting house in Kimberley. During this apprenticeship, he learned to separate and evaluate diamonds in their uncut form. He then moved to Johannesburg where he became his father's personal assistant in running the corporate empire. In "deviling" for his father, as he called it, he did everything from ghostwriting speeches to going on secret missions to New York for his father. Although his public role remained minimal during this period, his father had him appointed to the De Beers board of directors in 1937-when he was only twenty-nine.

  When the Second World War began in 1940, Oppenheimer volunteered to be an officer in the South African Union Defense Force. He was commissioned a second lieutenant in the Intelligence Section. After serving for several months on the General Staff in Pretoria, Oppenheimer was sent to Egypt as an intelligence officer with the Fourth South African Armored Car Regiment.

  Within weeks, his regiment was engaged in battles against German panzer divisions led by General Rommel. Even during this bitter desert campaign, he found time to correspond continually with his father about the prospects for the diamond business. "Not the profits but the many problems of the diamond trade make the diamond business the most interesting I know," his father wrote him in 1941. In another letter, his father stressed the critical importance of maintaining the monopolistic system of distribution: "Nothing I have said must be construed that I have lost my belief in limitation of output or sales through one channel." The channel was, of course, De Beers. In this wartime correspondence, Sir Ernest had no time for sentiment about the diamond invention. Stripping away all illusions, he wrote, "No diamonds are cheap if they cannot be sold or if they must be kept for years. The interest charge which one should remember and which one always forgot, eats up the profit."

  In July 1942, Lieutenant Oppenheimer was reassigned to the Coastal Command in South Africa, which had been set up to guard against Japanese infiltration and sabotage. He was stationed at Cape Town Castle, a fortress near the southern tip of Africa. Except for one attempt by four Japanese commandos to sabotage South Africa~s largest dynamite factory, which De Beers owned a controlling interest, there were no wartime activities for the
Coastal Command to concern itself with. During this relatively quiet tour of service on Robbins Island, Oppenheimer met Bridget McCall, a young officer in the Women's Auxiliary Army Service, who had just returned from school in England. Within months he proposed to her, and they married in a military ceremony on March 6, 1943. Nine months later, on New Year's Eve, they had their first child, Mary Oppenheimer, and then, less than two years later, their second, Nicholas Oppenheimer.

  When the war ended, Oppenheimer returned to the family business. He was managing director of De Beers, and second in command to his father. Even though he remained intimately involved with the strategic planning of the diamond cartel, he focused a great deal of his energies on South African politics. "If you are involved in a large bushiness enterprise, you've simply got to concern yourself with politics: it is not realistic not to do so," he has explained. In the postwar period, South Africa was deeply divided by two political forces. On the one hand, there was the United party, headed by General Jan Smuts, and backed by the English-speaking and relatively liberal segments of the other white population. It was committed to a policy of gradual accommodation with the non-white majority of the population and to keeping South Africa in the British Commonwealth. On the other hand, there was the Nationalist party, backed mainly by the Afrikaner-speaking settlers of Dutch origin, which insisted that South Africa maintain a policy of strict separation of the races, or apartheid. Since many of the leaders of the Nationalist party had been interned by the British in a De Beers-owned diamond mining camp for the duration of the war because of their suspected pro-German sympathies, they were eager to cut the ties with Great Britain and, if necessary, withdraw South Africa from the British Commonwealth. As the 1948 general election approached, white South Africans were confronted with a critical choice: They could vote for General Smuts's United party, and move toward gradual racial integration within the British Commonwealth, or they could vote for the Nationalist party, and proceed down the road of racial apartheid and international isolation.

  For Harry Oppenheimer, there was one conceivable course of action: to finance and support General Smuts. Smuts, who had been a poet, soldier, statesman and hero in South Africa since the Boer War, had been a close family friend of the Oppenheimers for forty years. He had even flown to England to attend Harry Oppenheimer's gala twenty-first birthday party at the Spreadeagle Inn. Aside from personal considerations, Oppenheimer realized that his family business operated throughout the British Empire the sights were in London, small diamonds were cut in Israel (then a British mandate), and diamonds were mined in British colonies in West Africa-and that if Smuts was defeated in the election, relations with England would be strained, if not completely severed. Diamonds were truly an international business, and Oppenheimer did not want to see De Beers isolated from its distribution network in London. Moreover, Oppenheimer personally opposed apartheid as both impractical and immoral.

  Not only did the Oppenheimer interest provide financing for most of the United party in 1948, but Harry Oppenheimer himself stood for Parliament in the district of Kimberley where he had the support of the diamond workers from the De Beers Mines. When the votes were counted, however, the United party found itself decisively defeated. General Smuts, after serving as prime minister for sixteen years, lost his own seat in Parliament. The Nationalist party, led by H. F. Verwoerd, won a resounding majority of the seats, and immediately moved to form a government that would begin implementing its policy of apartheid.

  One of the handful of United party candidates to win a seat in 1948 was Harry Oppenheimer. He had, however, no opportunity to influence the government. As he sat in Parliament, he saw apartheid laws enacted over his protest, and the nonwhite population stripped of every right they had gained. He also saw South Africa gradually slipping from the British orbit. Since the United party had collapsed, Oppenheimer provided most of the funds for a new party called the Progressive party-but it was never able to elect more than a few members to Parliament. The Oppenheimer interests also bought an important share of the English language press in South Africa, which shrilly attacked the government's racial policies. It was, however, to no avail. The Nationalists kept winning elections-and Harry Oppenheimer retired from Parliament, although he continued, almost single-handedly, to finance the Progressive party.

  When his father died in 1957, Oppenheimer withdrew entirely from South African politics and concentrated his energies on planning out a new future for the diamond cartel. He recognized that the geopolitical forces in Africa were rapidly changing, and that the problems he would confront in his efforts to preserve the diamond invention would be very different from the ones that his father had faced in colonial Africa. When Sir Ernest had brilliantly forged the elements in the diamond cartel, South Africa and most other diamond producing areas in the world were part of the British Empire, and he could count on the administrative powers of the British Colonial Office to help him protect one of the leading British exports-diamonds. The only diamond producers outside the British sphere of influence were the Belgian Congo and Portuguese Angola, both of which were colonies of countries allied with Great Britain. Sir Ernest did not have to concern himself with Marxist revolutions, nationalistic movements and hostile regimes.

  Whereas Sir Ernest had only to worry about economic changes, Harry Oppenheimer realized even as early as 1958, he has written, that he would have to prepare himself for violent political changes. A decade of apartheid under the Nationalist government had served to alienate South Africa from the rest of the Commonwealth. By 1961, South Africa was formally expelled from the Commonwealth and became a republic. As British colonies, such as Sierra Leone, Ghana and Tanzania, achieved their independence, they severed diplomatic relations with South Africa. Belgium also relinquished control of the Congo (which became Zaire), with its vast reserves of diamonds. As these newly independent nations grew increasingly hostile to South Africa, De Beers, which was, after all, a South African corporation, could not openly control their diamond fields. Then in 196 3, the Soviet Union called for a world boycott of trade with South Africa, and almost every nation in Africa Joined it (in theory, if not in fact). The United States even cut off military aid to South Africa. By the mid-1960s, South Africa became a pariah nation.

  To keep control over the world supply of diamonds, Harry Oppenheimer had to make covert arrangements with both the Russians and the African nations that produced diamonds. As early as 1964, Oppenheimer informed investors in his company that the "political situation in Africa has created new problems for our group.... There are obvious political objections to the purchase of production from African states." He further reported, "This unfortunate state of affairs has necessitated a considerable reorganization of the group's activities . . . [diamond] buying operations in the newly independent African states are now, in every case, undertaken by companies registered and managed outside the Republic of South Africa, and which are not subsidiaries of De Beers."

  In fact, however, these companies were created and controlled by Oppenheimer for the purpose of serving as intermediaries in the diamond arrangements. In other words, a complicated system of corporate fronts had been set up to obscure the movement of diamonds to De Beers from African states pledged to the destruction of South Africa.

  The Oppenheimer strategy was not aimed at deceiving the African governments themselves, for they were fully aware that De Beers was the ultimate operator of their mines and marketer of their diamonds. It was intended merely to provide a necessary cloak of "deniability" for African politicians. If any journalists or dissidents charged them with trading with the enemy, they could deny the charges and be at least technically truthful. The corporations with which they dealt were registered in Luxembourg, Liechtenstein, Switzerland, or England, and had innocuous names, such as the Diamond Development Corporation, or Mining and Technical Services, Ltd. They could remain conveniently blind to the fact that these intermediaries were creatures of De Beers, or that they immediately transferred thei
r diamonds to De Beers' Diamond Trading Company in London. The distinction was, however, a crucial one for many African governments because, at the very time they were earning a large portion of their hard currency from the Oppenheimer empire, they were demanding through the United Nations that other nations boycott South African business.

  The ever-expanding number of diamonds coming out of the Soviet Union proved to be an even more vexing problem for Harry Oppenheimer. His father had had only to concern himself with restricting and allocating the production of the diamond mines in Africa; he had to find ways to prevent the Soviets from flooding the world market with their diamonds. According to the geological reports he received, Soviet mines in Siberia had a potential for producing more diamonds than did all the mines in South Africa. He realized that if the Soviets ever attempted to market their diamonds in competition with De Beers, the price might collapse. He therefore moved to bring the Soviet Union into the cartel arrangement, since, as he eloquently put it, "a single channel ... is in the interest of all diamond producers whatever the political difference between them may be." In return for not competing with De Beers, he offered to buy up the entire Soviet production, year after year, of uncut gem diamonds at prices higher than the Soviets could otherwise obtain on the free market.