DIRTY DIAMOND INDUSTRY: DeBeers Makes Something Out of Nothing

There’s an old wives’ tale about diamonds being indestructible. That’s balderdash. Sit a stone on a steel table, raise a heavy, metal mallet above your head and if you smack the sucker straight on, your diamond will split. If you’re lucky, it will shatter.

But who in their right mind would want to shatter a precious stone?

Yet, the thing is: perhaps diamonds aren’t actually that precious at all. No doubt, they seem to be. Engagement rings cost thousands, tens of thousands, even hundreds of thousands of dollars. Yes, diamonds are the hardest naturally occurring material (it does, indeed, take a diamond to scratch another diamond). Polished, many diamonds are simply brilliant. Their being precious lends a seeming truth to the ubiquitous tag line, “A Diamond is Forever.” But what happens if you ask, how forever are they?

Back in 1982, Edward Jay Epstein wrote a tell-all history of De Beers in the Atlantic Monthly, and with it dissolved some of that salacious shine. De Beers, the South African cartel who has essentially acted as miner, distributor, and most importantly, price-fixer for the diamond market throughout the 20th Century, took diamonds, once worth nothing, and indeed invented their value.

“De Beers proved to be the most successful cartel arrangement in the annals of modern commerce. While other commodities, such as gold, silver, copper, rubber, and grains, fluctuated wildly in response to economic conditions, diamonds have continued, with few exceptions, to advance upward in price every year since the Depression . . . The diamond invention is far more than a monopoly for fixing diamond prices; It is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. To achieve this goal, De Beers had to control demand as well as supply.”

Control, they did. After the Depression, the company hired the advertising firm N. W. Ayer to, in essence, create a U.S. market. They were pioneers in the advertising industry. They lectured high school girls on the links between true love and shiny diamonds, among other things. Once the U.S. market was established, they shifted to Japan and created a sense of value around diamonds there.

For decades De Beers literally held almost all of the world's diamonds, thereby controlling completely their cost. It's not a market at play here, it's simply a genius -- albeit manipulative -- sales and marketing scheme.

And lest we forget, value depends on scarcity, and if diamonds are forever, that means no one is reselling them. Supply steadily decreases, and the stones become all the more scarce. It’s good for business, only, if only one shop is running the show, is that really good business?

(Diagram of diamond lattice structure from Wikipedia.)