Thursday, October 22, 2009

The Arrangement Chapter Ten

To perpetuate the diamond invention, it was not sufficient for De Beers merely to own the large mines that produced most of the world's diamonds. It had to control the production from all other significant sources, including the scattered diggings in Africa and the jungle streams of South America. It had to be able to assure the major diamond cutters and dealers that they had no alternative source for their diamonds other than De Beers' operation at Charterhouse Street in London. If its clients believed that it would be possible to buy diamonds from diggers, tribesmen, smugglers and small mine owners, De Beers could no longer compel them to adhere to its rules for avoiding price competition.

Oppenheimer therefore negotiated a series of secret arrangements to block the availability of diamonds from the sources his company did not directly own or control. In South Africa and the Belgian Congo, he pressed the governments into passing laws that forced independent prospectors and diggers to sell their diamonds only to government-licensed diamond buyers, who in turn contracted to sell their diamonds to De Beers' subsidiary, the Diamond Trading Company. In British colonies, such as Sierra Leone, he contracted to buy whatever diamonds were unearthed from British mining companies, such as the Selection Trust, which held the mining concessions there. In South America, where the alluvial diamond fields were scattered over vast areas, he arranged deals with local buying agents to buy up loose diamonds. In all cases, Oppenheimer required that the total production of diamonds be turned over to De Beers or its subsidiaries at an agreed-upon price.

When diamonds were found in the British colony of Guiana in 1925, De Beers, acting through its diamond syndicate in London, made an arrangement to buy the entire production, which amounted to about 12,000 carats a year. The agreement, drawn up by Otto Oppenheimer, specified that the price paid by the syndicate for these diamonds would be established through a sorting procedure. Moreover, it was stipulated that Oppenheimer would be the "technical advisor" to the diamond miners, and, as such, he would be solely responsible for defining the assortment. According to the contract, Oppenheimer's decision on the sorting could not in any way be questioned or redressed. This meant, in effect, that Oppenheimer could determine what price would be paid to the Guianans, and if they found the price too low, they were restricted by the contract from selling the diamonds to anyone else.

As De Beers found that its own mines were producing more diamonds than it could market, its interest in this arrangement was not to stimulate further production in South America but to prevent these diamonds from finding their way into the market at an unfortunate time. Once the contract was signed, Oppenheimer began adjusting the sorting procedures by creating grades of "finer" diamonds. This maneuver effectively reduced the average price paid by the syndicate for Guianan diamonds by over 50 percent. At these low prices, the Guianan mining company, United Diamond Fields of British Guiana, Ltd., could no longer afford to buy diamonds from the native diggers. Consequently, the company's production, which was based entirely on what these diggers found and turned in, fell from 12,000 carats to 3,000 carats a year. Bound by its contract to accept the syndicate's price, the company went bankrupt in 1927, and Guiana diamonds ceased to be a threat to De Beers. The details of this arrangement emerged only in 1932 when a director of United Diamond Fields sued Otto Oppenheimer for fraud. After demonstrating that Oppenheimer had falsified an important certificate of evaluation, the director's lawyer, Sir Patrick Hastings, forced the syndicate to pay his client a large cash settlement. There was, however, one maverick geologist who refused to accept this crucial arrangement, Doctor John Thornburn Williamson. Williamson was a rugged Canadian geologist who, after he left the employ of De Beers in 1932, began prospecting on his own for diamonds in what is now Tanzania.

In 1943, Dr. Williamson intrepidly traced a mineral often found in association with diamonds back to its source at Mwadui, where Williamson uncovered the largest diamond mine that had ever been found. The oval-shaped volcanic pipe, which was filled with diamondiferous ore, covered some 361 acres on the surface; and it was four times larger than any of the diamond pipes found in South Africa.

A De Beers team of prospectors had explored the territory around Mwadui a decade earlier without reporting any trace of diamonds; now De Beers had to prevent Williamson from flooding the market with these diamonds. When the extent of the diamond strike became clear in 1945, Ernest Oppenheimer offered Williamson 2 million pounds sterling for the mine. Even though this was an enormous sum of money then, and Williamson himself was penniless, he turned down the offer. After spending ten years in the jungles of Africa in solitary pursuit of diamonds, he was not about to sell out. He wanted to build his own empire. With the backing of a number of Indian merchants and a task force of Italian prisoners of war, he began excavating the diamonds from the pipe. By 1946, he had some 6,000 workers living with their families at Mwadui, and over 200 armed guards protecting his budding empire. The entire encampment was surrounded by two barbwire fences and protected by primitive gun fortifications.

As the diamonds began to pour out of Mwadui, De Beers became increasingly concerned about its ability to control world prices. The corporate minutes of De Beers on June 20, 1946, reflect this growing apprehension. "The chairman (Sir Ernest Oppenheimer) said that he was sure that a satisfactory outcome would result from negotiations with the British Colonial Office over a prospecting license for De Beers, but he said that the position would not be secure until they were able to come to terms with Williamson. He mentioned that the Tanganyika production was now one and one-half million pounds per annum. . . . He very much doubted whether, at the moment, he had 65 percent effective control of world production." Oppenheimer pointed out that this uncontrolled production could prove "embarrassing" if there was an economic recession, and he recommended, according to the notes of the meeting, "that their efforts should be energetically directed towards obtaining effective control of all African production."

The diamond sights in London proved to be one effective means of reasserting control of the Mwadui diamonds. Dr. Williamson had to sell the low as well as high quality diamonds he mined to diamond cutters in order for his mine to be profitable. Most of the major cutting factories, especially for the more difficult-shaped diamonds, were clients of De Beers. When these clients came to the London sights, they were told, according to reports reaching the U.S. Department of justice, that they should not buy any of Williamson's diamonds. The threat was implicitly made that they might find their consignment drastically reduced or even abruptly ended if they bought any diamonds from Williamson. Since few of the cutting factories in Antwerp were willing to risk their sight in London by violating this rule of the game, Williamson found that he could only sell the clear, octahedron crystals that were in demand by small, independent cutters. He had to store most of the clear diamonds. This severely squeezed his cash reserves.

De Beers also applied pressure on Williamson through the British Colonial Office. When its representatives privately advised the British Exchequer of its he stockpile of diamonds, De Beers quickly brought pressure on the Colonial Office to remedy the situation. Diamonds, after all, earned at that time more foreign exchange for Great ,Britain than almost any other export, and the British government.. At about this time, Colonial Secretary Arthur Creech Jones advanced the idea to nationalize the Williamson diamond mine. In an official white paper, Creech Jones suggested that the colonial government, through nationalization, might better be able to control the exploitation of a mineral resource than a private company.

For Williamson, the message was clear: Either he make his deal with De Beers or his mine might be nationalized. Finally, in August of 1947, Williamson acquiesced to these pressures, and Creech Jones announced in the House of Commons that Williamson had agreed to sell his entire output through the Diamond Trading Company in London. Williamson was now part of the arrangement.

Oppenheimer went on to make similar arrangements with any other person, corporation or nation that discovered diamonds. He was in a position to either buy them out directly or to contract to buy all the diamonds their mines produced. It was a mutually profitable arrangement.

During Sir Ernest's lifetime, De Beers never discovered a diamond mine itself. Oppenheimer saw little point to investing profits in exploring for diamonds, since De Beers made its profits from a scarcity, not an abundance, of diamonds. As he established it, one of the cardinal principles behind the diamond invention was that demand for diamonds was fixed each year and varied only with the number of engagements.

Any sudden increases in the production of diamonds would therefore have to be added to De Beers' stockpile rather than its profit, and it made little sense for Oppenheimer to create new mines until the old ones were depleted. Instead, Oppenheimer reinvested the stream of profits into gold mines in the Orange Free State province of South Africa. The gold production would provide a reserve of capital for De Beers that would allow it to buy back diamonds if the retail market ever slackened.

By the time Sir Ernest died in 1957, he had turned the diamond invention into a powerful instrument for preserving the price of diamonds. By merging the mines in South Africa with the syndicate in London, he created a double-edged sword, production and distribution, for maintaining his control over the diamond industry. Through secret arrangements that he patiently and meticulously made with independent mine owners, he managed to channel almost all of the world's uncut diamonds through this system.

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