Thursday, October 22, 2009

Diamonds For Hitler Chapter Nine

The strategic importance of diamonds became acutely clear to both the Allies and Axis powers with the approach of the Second World War in 1939. Only diamonds were hard enough to stamp out the millions of precision parts that were necessary for mass-producing airplane engines, torpedoes, tanks, artillery and the other weapons of war. Only diamonds could be used to draw the fine wire needed for radar and the electronics of war. Only diamonds could provide the jeweled bearings necessary for the stabilizers, gyroscopes and guidance systems for submarines and planes. Only diamonds could provide the abrasives necessary for rapidly converting civilian industries into a war machine. Without a continuing supply of diamonds, the war machine would rapidly slow to a halt. Yet, nearly all the diamond mines remained closed, and De Beers controlled the world supply of diamonds. Obtaining these industrial diamonds thus became a paramount objective for both the United States and Hitler's Germany.

In Washington, D.C., the administration of President Franklin D. Roosevelt began to hold emergency meetings about diamonds in 1940 when Hitler's armies swept across Europe in a blitzkrieg and threatened to invade England. The possibility had to be at least considered that England, like France, might be overrun or surrender. In that event, the world diamond stockpile would fall into Hitler's hands. Since the United States had less than one year's supply of industrial diamonds, the loss of De Beers' stockpile would make it difficult, if not impossible, to continue the war. The economic planners for the war estimated that the United ,States needed at least 6.5 million carats of industrial diamonds to convert its factories to war production.

When apprized of this critical shortage in diamonds, President Roosevelt ordered the War Production Board, which had the responsibility for mobilizing the American economy for war, to buy the necessary 6.5 million carats from De Beers. De Beers, however, had other interests to consider. Its entire system for monopolizing diamonds depended on its controlling the available stockpile. Transferring a large portion of the stockpile from London to New York City, where it would be out of its control, ran counter to the De Beers logic.

Even though the Americans persisted in the negotiations for the diamonds, they found that Sir Ernest Oppenheimer personally opposed any transfer of diamonds to the United States. He argued that if the United States had its own stockpile, and the war suddenly ended, it might release the diamonds and undercut the entire world order that he had so laboriously constructed. Moreover, he held that the United States had sufficient diamonds for present needs, and that De Beers would continue its delivery of diamonds to American manufacturers on a monthly basis. In one letter, he characterized the American demand for a stockpile as "farcical."

The Americans were dismayed by this intransigence. In an official Justice Department memorandum, the War Production Board expressed incredulity at the fact that "the leaders of the syndicate are intentionally risking the war production of the allies." President Roosevelt, disturbed by this development, ordered the State Department to intervene directly with Winston Churchill's war cabinet in London.

The State Department found, however, that the British government was reluctant to press De Beers to part with the diamonds. An investigation by U.S. intelligence indicated that the division of the British government responsible for acting on the request was entirely staffed by former executives of the De Beers "syndicate." In a secret memorandum, the War Production Board noted, "The diamond section of the government and the syndicate seem to be the same."* After the Roosevelt administration had made continuing efforts to persuade the British government that the diamonds were of critical importance to the United States war effort, it ordered the State Department to play its trump card and threaten that the United States would interrupt the supply f airplanes that was vitally needed by the British to defend themselves against the Luftwaffe bombing raids. According to a confidential report in this Justice Department archive, dated April 16, 1942, "It was said unofficially that we would not give planes to England if the syndicate would not sell us the diamonds with which to make them." This dramatic threat had the desired effect. The British government pressed De Beers to accommodate President Roosevelt, and De Beers yielded.

Oppenheimer agreed to supply the United States immediately with one million carats--14 percent of the American request---and deposit an additional stockpile in Canada for the duration of the war. This Canadian stockpile, which would remain under De Beers control, was meant to mitigate the American concern over the possible capture of the London stockpile.

The Roosevelt administration was not entirely satisfied with this compromise. It continued to apply pressure to the British government, demanding that De Beers supply the additional 5.5 million carats. By this time, the air of crisis had passed, and De Beers was able to procrastinate successfully. At first, it claimed that it did not have enough diamonds in its vaults to supply this amount. Then, after U.S. intelligence debunked this claim, De Beers advised that its vaults were bombed shut" in an air raid on London. A year passed. Then De Beers asserted that it needed additional time to prepare an inventory of the diamonds it had available.

By this time, American officials feared that De Beers, despite the pressure exerted on it, had no intention of allowing a diamond stockpile of any magnitude to be established, even in Canada. Moreover, manufacturers of. diamond tools in the United States had begun complaining to the Office of Price Control that De Beers had effectively raised its prices as much as 60 percent through the device of reducing the quality of the diamonds it delivered. So, though the official price per carat remained the same, manufacturers had to buy more of the lower quality diamonds to build the tools and dies for industry. Since it was exceedingly difficult for the price control officials to measure the relative quality of industrial diamonds, De Beers was able to persist in its claim that it had not raised prices. In any case, the Justice Department concluded that the De Beers monopoly, by manipulating supplies from the stockpile, could impede the war effort.

The Justice Department decided then to launch its own investigation into the diamond monopoly. It had the full cooperation of the War Production Board, which still wanted control of the diamond stockpile, and the OSS, the newly created U.S. wartime intelligence service. The Investigators were not held back by any inhibitions about intercepting mail, borrowing bank records or other such extralegal measures. They all shared a common objective: helping the war effort. In their roughshod manner, they soon began turning up bits of evidence indicating that De Beers had systematically stifled diamond mining in areas of the world over which it could not exert control. For example, intercepted letters from Oppenheimer's associates suggested that litigation had been initiated in Venezuela to prevent Nelson Rockefeller and other Americans from developing diamond mines in that country. One such letter detailed the possibility of competition in Venezuela, and asked an intermediary to suggest to Oppenheimer that he be "ruthless in stamping it out." Another intercepted letter from a Belgian diamond executive suggested that De Beers was intentionally exhausting the diamond mines in the Belgian Congo, while preserving its mines in South Africa, so that after the war was over De Beers "will have complete control over the market.." Justice Department investigators also looked into charges that De Beers had conspired to buy out and shut down potential diamond mining areas in the country of Guyana and the state of Arkansas.

In Arkansas, it was charged that after diamonds were found there, Oppenheimer bought control of the company that was to mine the diamonds. Then, when the separation plant built on the site failed to produce a sufficient quantity of diamonds per ton of ore to make the mine profitable, it was closed. Subsequently, it was charged that the separation plant had been designed by the engineer in such a manner that it could not possibly retrieve diamonds. It emerged that the engineer was in the employ of De Beers. The mine, which was bought out by associates of Ernest Oppenheimer, was ordered closed in 1921 after Oppenheimer met the mine officials in New York, and the mine's records were ordered destroyed. "An inference could be drawn . . . "the Justice Department memorandum noted, "that the property was sabotaged and then closed at the insistence of Sir Ernest Oppenheimer." The evidence was admittedly highly circumstantial.

Whatever were the specific tactics of De Beers, the justice Department investigators reached the conclusion that the singular effect of these efforts was to artificially restrain the production of diamonds. This, in turn, produced higher prices. A 1944 memorandum to the attorney general concluded, "The United States is paying monopoly prices for an essential material needed in wartime production." If De Beers were an American company, the memorandum continued, "There would be no question as to [its] having violated the anti-trust laws." Since De Beers was a South African corporation, the Justice Department had to demonstrate that it had some jurisdiction over its activities before it could consider prosecuting it.

The FBI was called in to interview the leading diamond dealers in New York to determine whether De Beers, which sold them diamonds, could be construed as transacting business in the United States. The FBI reported, "The domestic trade operates in relative secrecy.... The syndicate will sell only to a small group of hand-picked dealers." It further noted that De Beers officials avoided coming to the United States, and all transactions took place in London. Further inquiry showed that De Beers had closed all its bank accounts in the United States at the outset of the investigation.

The assistant attorney generals at the Justice Department who had superintended the investigation realized that the antitrust division had little chance of ever bringing De Beers to court in the United States. Despite all the prodigious investigative efforts, the case was abandoned in late 1945.

None of these documents cast any light on the question of how Hitler continued to obtain diamonds for the duration of the war. There was, however, an investigation of this problem by the OSS, the forerunner of the CIA.

According to a summary of OSS documents, the OSS learned through its agents in Germany that in November of 1943 Hitler had only an eight-month supply of industrial diamonds. When these diamonds ran out, Hitler's war machine would be crippled. It would no longer be possible to build V-2 rockets or other exotic weaponry. It was thus a crucial wartime goal to prevent Hitler from replenishing his supply of diamonds.

As all mines in South Africa were closed, the OSS reckoned that there was only one place on earth from which the Germans could get industrial diamonds in sufficient quantity to maintain their .military-industrial complex: the Belgian Congo. The Belgian Congo was, however, administered by the Belgian government in exile, which was in London and completely under British control. The mines themselves were supervised, and policed, by the De Beers syndicate. In fact, when the justice Department began to move against De Beers, the War Department objected on the grounds that it might undercut the security system that De Beers had developed in the Belgian Congo. In an exchange of secret correspondence between the War and Justice Departments (which was declassified under my Freedom of Information request), it was argued by an official responsible for maintaining the diamond blockade that "almost the entire [diamond] production of Africa is policed through the operation of elaborate controls extending through every mining area of the continent." Further, De Beers, which administered this program, sent "this controlled production ... in a closely guarded stream to London."

The OSS had determined, however, that tons of diamonds were somehow reaching Nazi Germany. If the De Beers system of "elaborate controls" was as effective as the War Department held, how could such enormous quantities of diamonds be regularly reaching Germany? To answer this question, the OSS had proposed sending its own undercover agents from its field office in Accra to the Belgian Congo. Since the British Ministry of Economic Warfare was responsible for allied activities in the Congo, this OSS action had to be cleared in London. At first the ministry blocked the request, and then it had proposed a joint "diamond investigation." OSS agents met with their British counterparts, but little was done to pinpoint the source of the smuggling. Finally the OSS chief in Accra reported to Washington, D.C.:

"We have now come to the conclusion (a) that our assistance was requested in this program so that the Diamond Trading Corporation might discover how much we actually knew of the ramifications of the De Beers world monopoly, and (b) that the OSS/Accra recommendations for a Security Committee were sabotaged, not by the British Government, but by the representatives of the Diamond Trading Corporation, Ltd., London, through their domination of the Diamond Committee of the Ministry of Economic Warfare."

As the OSS pursued the investigation, it found that the diamonds were reaching the Axis powers through Tangier and Cairo. Its agents, posing as illegal buyers in these entrepots, found that industrial diamonds were being sold for $26 a carat, which was thirty times the official price. It became increasingly clear that enormous profits were being made on the millions of carats that were being smuggled into Germany. Tracing their way back through the chain of illegal sellers, an OSS agent code-named Teton reported back from Leopoldville that "the major source of leakage was the Forminiere Mines," which had been under the control of the syndicate ever since they were developed. According to the OSS report, Teton, pretending to be an American official who had come to the Congo to register "all American males of draft age," made highly productive "contact" in Leopoldville and eventually turned up evidence "that a full year's supply of diamonds had reached Germany from Forminiere through Red Cross parcels." The shipment of several million carats of diamonds through the parcels that were regularly sent from the Congo to Nazi-occupied Belgium required considerable organization and support in the intervening areas.

Even though the investigation was causing great concern in the diamond section of the Ministry of Economic Warfare, Teton was ordered by the OSS to continue following the leads he had developed. Teton suspected that the Belgian police chief in Leopoldville was involved in the massive smuggling operation, and to test his suspicions he gave money to a Belgian citizen to make illegal diamond purchases in Leopoldville. As Teton suspected, the diamonds 'traced directly to the police chief.

Before Teton could follow the trail any farther, however, e Belgian citizen was arrested by the police. The Belgian identified Teton as his source for the funds, and Teton was declared persona non grata by the governor general of the Congo, and expelled.

It again seemed to the OSS that British interests had stifled the investigation.

In February of 1944, British and American intelligence officials met in Accra to attempt to resolve the jurisdiction problem. Rejecting the OSS idea of an "advisory commission" on diamond smuggling, the British decided instead have a diamond security expert and a mining engineer, bo of whom were to be hand-picked by Sir Ernest Oppenheimer, conduct a security study of the mine. Even though this self-serving plan was never actually implemented, the OSS concluded, "Thus the responsibility for security would have been turned over entirely to the industry."

Nevertheless, it was decided that British Intelligence would have the responsibility for interdicting the flow of diamonds to the Nazis. The OSS report noted that although this British intelligence operation was initially "well-planned," it was unable to cope with the Syndicate's control of the industry and its dealing with the enemy."

The suggestion that the De Beers-controlled syndicate was "dealing with the enemy" was not accepted; or at least not acted upon by the U.S. War Department. In a secret memorandum, dated November 21, 1944, Patrick A. Gibson wrote Assistant Attorney General Edward S. Stimson, "I suppose that we could not make any allegation that the defendants (De Beers) themselves have prevented effective control of leakage of industrial diamonds to Germany. . . Any theory of this nature would seem to depend upon supporting action by some units of the British Government. Clearly, the British government was not about to investigate such a sensitive matter. It was therefore concluded that it would be imprudent to "be involved in a controversy of this nature." With the end of the war in 1945, the OSS was dissolved, and the question of "dealing with the enemy" was never resolved.

American servicemen returned from overseas and purchased diamond rings for engagements that they had deferred. To meet the new demand, De Beers re-opened its mines in South Africa. The diamond invention had survived the war intact.


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