Wednesday, October 03, 2007

Boycott Diamonds

The English word “diamond” comes from the Greek αδάμας (adamas), meaning “invincible.” The mythical substance of “adamantine”—what Milton’s god bound Satan, and death itself, with—was at one point inspired by the hardness of diamonds. Diamond is the hardest material on earth, made of pure carbon packed into a crystalline structure so tightly that it becomes clear. This gives diamonds some very useful applications with optics, or diamond-edged blades that can cut through anything. What would likely surprise the average person most is to know that diamonds aren’t actually rare at all. Our cultural attitude towards diamonds, and even their supposed “rarity,” have little or nothing to do with the stone itself, and everything to do with one of the most vile corporations to ever afflict the human race—and its campaign to shape our very culture to its own ends.

Cecil John Rhodes, in many ways, epitomized the merciless European exploitation of the colonial era. He colonized Rhodesia, and named it for himself—and made a fortune by exploiting the rich resources of South Africa. He used his fortune to start the Rhodes Scholarship, largely in the hopes of putting the United States into the hands of philosopher-kings who would be wise enough to repent of their country’s ill-considered rebellion and rejoin the glorious British Empire, and once famously declared, “all of these stars… these vast worlds that remain out of reach. If I could, I would annex other planets.” He was a blatant racist who dedicated his life to expanding the empire, in order to serve the great destiny of the Anglo-Saxon race. In his time, the Boers in South Africa were setting up the colonial system of exploitation that would eventually be epitomized in the system of apartheid. Rhodes’ entrepreneurship was a major boon to that enterprise, and much of it was financed by the profits he made from the diamond mining activities he began when he bought a farm where diamonds were showing up. He named his company after the settlers who owned that farm: Nicolaas and Diedrick DeBeer.

In the mid-1890s, Rhodes founded the aptly-named Diamond Syndicate, which eventually morphed into the Central Selling Organization. As Rhodes was discovering in South Africa, diamonds are actually fairly common.

The diamond invention—the creation of the idea that diamonds are rare and valuable, and are essential signs of esteem—is a relatively recent development in the history of the diamond trade. Until the late nineteenth century, diamonds were found only in a few riverbeds in India and in the jungles of Brazil, and the entire world production of gem diamonds amounted to a few pounds a year. In 1870, however, huge diamond mines were discovered near the Orange River, in South Africa, where diamonds were soon being scooped out by the ton. Suddenly, the market was deluged with diamonds. The British financiers who had organized the South African mines quickly realized that their investment was endangered; diamonds had little intrinsic value—and their price depended almost entirely on their scarcity. The financiers feared that when new mines were developed in South Africa, diamonds would become at best only semiprecious gems.

The major investors in the diamond mines realized that they had no alternative but to merge their interests into a single entity that would be powerful enough to control production and perpetuate the illusion of scarcity of diamonds. The instrument they created, in 1888, was called De Beers Consolidated Mines, Ltd., incorporated in South Africa. As De Beers took control of all aspects of the world diamond trade, it assumed many forms. In London, it operated under the innocuous name of the Diamond Trading Company. In Israel, it was known as “The Syndicate.” In Europe, it was called the “C.S.O.”—initials referring to the Central Selling Organization, which was an arm of the Diamond Trading Company. And in black Africa, it disguised its South African origins under subsidiaries with names like Diamond Development Corporation and Mining Services, Inc. At its height—for most of this century—it not only either directly owned or controlled all the diamond mines in southern Africa but also owned diamond trading companies in England, Portugal, Israel, Belgium, Holland, and Switzerland.

Nature had not provided the scarcity necessary to sell diamonds at such high prices, so Rhodes decided that an artificial scarcity was required.

De Beers has managed the remarkable feat of operating a 17th century economic model in a 21st century world. Fluctuations of supply and demand are not tolerated. Three floors beneath us are a series of vaults that contain the world’s largest stockpile of unpolished diamonds—the best estimates put it at half a billion dollars. To De Beers, they remain much more valuable right where they are. The continuing stability of the diamond industry depends on an artificial scarcity that De Beers has worked hard to create.

Without De Beers’ warehouses, the diamond industry would collapse overnight; if diamonds were fairly traded, their abundance would make them quite cheap indeed. That is why De Beers has put such efforts into buying up all the diamond mines it can find; not to sell them, but to lock them away to make sure than no one else is selling them.

The Syndicate got its first strong competition in the first decade of the 20th century, when new mines were discovered in South Africa and South West Africa (now Namibia). Ernest Oppenheimer’s Anglo-American Corp. began with those mines, and continued acquiring mines in the early 1920s. Oppenheimer bought a seat on the De Beers board in 1926, and became chairman in 1929. The Oppenheimer family still controls Anglo-American and De Beers today.

In the United States, De Beers operates primarily via “Sightholders” who purchase their diamonds from De Beers—thus remaining outside the purview of U.S. anti-trust laws. With the shifting of the post-colonial period, De Beers has adapted as well, but it has remained true to the ruthless, exploitative spirit of its founder. During apartheid, De Beers was one of the few multinational corporations that remained loyal to the South African government despite international pressure, supplying funds that helped the government maintain its programs of repression and torture on the native black majority. De Beers has made arrangements with African governments (as with Botswana’s “Debswana”), as well as rebel factions—and just as often, both. This practice, and De Beers’ artificially maintained high prices, made diamonds the currency of choice among warlords, with “blood diamonds” or “conflict diamonds” financing some of the most cruel atrocities ever committed in Africa. De Beers even played a role in helping to keep the nuclear arms race going.

Most spectacularly, after geologists in the Soviet Union came across a huge field of diamonds in the Siberian tundra in 1956, De Beers made an unprecedented offer: it would buy the entire run at a guaranteed price. The profits—estimated at $25 million a year—bolstered the Kremlin’s treasury and helped fund the buildup of nuclear arms. The Russian gems went into the vaults under Charterhouse Street. When the Soviet Union unraveled in 1990, De Beers went back to Moscow, offering the transitional government $1 billion in exchange for part of the nation’s stockpile of Siberian diamonds.

Through most of the 20th century, De Beers controlled something between 85% and 90% of the world’s diamond supply—Rockefeller’s Standard Oil and Gates’ Microsoft briefly flirted with such astonishing dominance, but De Beers maintained this strangle hold for a full century—making it the most dominant monopoly in history. But in 2000, Ernest Oppenheimer’s grandson, Nicky Oppenheimer, announced that De Beers would be relinquishing its monopoly. Many heralded it as the end of the De Beers’ unprecedented monopoly, but others recognized a reorganization to avoid more stringent European Union laws against monopolies.

Why would a company voluntarily abandon the hegemony it had held for more than 100 years? This is the question I set out to answer over three months of reporting this winter. I traveled through the company’s mining operations in Africa; toured the diamond-laden sorting rooms of its sales and marketing hub in London; and interviewed more than a dozen senior De Beers executives and innumerable other players in the secretive diamond business. And gradually I realized that I needed to ask an altogether different question: Was De Beers really changing at all? Or had it crafted a tale designed to seduce and appease worried antitrust regulators in the U.S. and Europe–a tale that concealed the fact that the company’s new initiative might make it as dominant in the future as it ever was?

My suspicions were confirmed by an announcement on Feb. 1, a shock that caught the industry by surprise: Anglo American PLC, the South African mining giant that is also controlled by the Oppenheimers, was in talks to buy De Beers. …

When Ernest took control of De Beers’ board in 1929, he initiated a cross-holding arrangement that has since grown immensely complicated. Currently De Beers owns 37% of Anglo’s stock, while Anglo holds 33% of De Beers–a setup stock analysts say distorts the earnings of both companies. The Oppenheimer family controls a large percentage of each company’s shares. So even if a buyout goes through, with Anglo American CEO Anthony Trahar as nominal chief of the company, the Oppenheimer family will retain a controlling influence–especially over the diamond business.

The so-called “Supplier of Choice” program may get around anti-trust laws in the European Union, and presents just enough of a legal fiction to make DeBeers no longer technically a monopoly, but the genius of the program is that it actually increases DeBeers’ control of the diamond industry.

From 2002 through the beginning of 2005, DeBeers has reduced the number of sightholders from approximately 120 to 80, as a part of it’s “Supplier of Choice” program. Under this program, DeBeers will try to consolidate the diamond market from rough production through retail, eliminating many of the current participants in diamond production and sales. The impact on the diamond cutting industry and jewelry retailers (among others involved in the diamond trade) could be enormous. Does this mean that the price of diamonds will come down? Not on your life! It means that DeBeers and it’s sightholders will probably make a greater percentage of the total take from the diamond market than it currently does.

Even so, ruthless domination of the market by any means necessary and global price-fixing were only one half of what De Beers needed: the other half was a cultural engineering project on the grandest scale, to reinvent the Western notion of love in its own consumerist image, and to mold an entire culture to suit its needs. The De Beers’ “A Diamond is Forever” marketing campaign is one of the most astonishingly successful examples of demand creation in history.

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. Both women and men had to be made to perceive diamonds not as marketable precious stones but as an inseparable part of courtship and married life. To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever—”forever” in the sense that they should never be resold.

The techniques used by De Beers are of course quite common now, but De Beers was one of the pioneers in the new field of “public relations,” as Edward Bernays called it, noting that “propaganda” had taken on a negative connotation (which he disagreed with). In his famous book, Propaganda, Bernays wrote, “If we understand the mechanism and motives of the group mind, is it not possible to control and regiment the masses according to our will without their knowing about it? The recent practice of propaganda has proved that it is possible, at least up to a certain point and within certain limits.” He called this scientific technique of opinion-molding the “engineering of consent.” Bernays was the nephew of Sigmund Freud, and though the psychoanalytic approach Freud advocated has largely fallen out of favor for the theraputic ends he intended it, it has proven fundamental—thanks to Bernays—to the manipulation of mass psychology via marketing. Bernays relied heavily on Freud’s theories, and considered his own work as the application of Freudian psychology to large groups. In fact, much of Freud’s renown in the United States is due to Bernays’ promotion—before him, Freud’s work was not even translated into English. In Propaganda, Bernays not only justified such manipulation, but made the argument that such deceptions were essential to the maintenance of orderly society.
The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our world. … We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. … In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons … who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind.

To suggest Bernays’ power, despite the fact that he is almost completely unknown to most Americans, one need only list some of the common tropes he introduced, which we normally take for granted as simply part of American culture: the importance of Sigmund Freud already mentioned, “bacon and eggs,” the cigarette as a symbol of rebellion and independence, the automobile as a symbol of freedom, and even the practice of presidents meeting with entertainment celebrities were all first introduced by Edward Bernays. Bernays was also aware of the formative role his work played for the Nazi party.

Bernays revolutionized the concept of the commercial, from simply informing one’s audience that a product exists, to manipulating subconscious desires to link deep-seated emotional needs unmet by civilization, to the consumption of goods. Many saw through to the madness of such an idea; then Supreme Court Justice Felix Frankfurter wrote to FDR to warn him about Bernays, calling him and Ivy Lee “professional poisoners of the public mind, exploiters of foolishness, fanaticism and self-interest.” Nonetheless, the economic potential of such large-scale manipulation of the public’s emotions was too great to pass up.

Though the first diamond engagement ring was given to Mary of Burgundy in 1477, up until the emergence of De Beers, engagement rings were adorned with any number of gems. It was De Beers’ marketing campaign that created the diamond engagement ring as we know it today.

Oppenheimer suggested to Lauck that his agency prepare a plan for creating a new image for diamonds among Americans. He assured Lauck that De Beers had not called on any other American advertising agency with this proposal, and that if the plan met with his father’s approval, N. W. Ayer would be the exclusive agents for the placement of newspaper and radio advertisements in the United States. Oppenheimer agreed to underwrite the costs of the research necessary for developing the campaign. Lauck instantly accepted the offer.

In their subsequent investigation of the American diamond market, the staff of N. W. Ayer found that since the end of World War I, in 1919, the total amount of diamonds sold in America, measured in carats, had declined by 50 percent; at the same time, the quality of the diamonds, measured in dollar value, had declined by nearly 100 percent. An Ayer memo concluded that the depressed state of the market for diamonds was “the result of the economy, changes in social attitudes and the promotion of competitive luxuries.”

Although it could do little about the state of the economy, N. W. Ayer suggested that through a well-orchestrated advertising and public-relations campaign it could have a significant impact on the “social attitudes of the public at large and thereby channel American spending toward larger and more expensive diamonds instead of “competitive luxuries.” Specifically, the Ayer study stressed the need to strengthen the association in the public’s mind of diamonds with romance. Since “young men buy over 90% of all engagement rings” it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.

Since the Ayer plan to romanticize diamonds required subtly altering the public’s picture of the way a man courts—and wins—a woman, the advertising agency strongly suggested exploiting the relatively new medium of motion pictures. Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. In addition, the agency suggested offering stories and society photographs to selected magazines and newspapers which would reinforce the link between diamonds and romance. Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman. Fashion designers would talk on radio programs about the “trend towards diamonds” that Ayer planned to start. The Ayer plan also envisioned using the British royal family to help foster the romantic allure of diamonds. An Ayer memo said, “Since Great Britain has such an important interest in the diamond industry, the royal couple could be of tremendous assistance to this British industry by wearing diamonds rather than other jewels.” Queen Elizabeth later went on a well-publicized trip to several South African diamond mines, and she accepted a diamond from Oppenheimer.

DeBeers even worked to promote the notion that the engagement ring should be presented as a surprise—specifically to ensure that there would be no discussion, and no chance for the bride-to-be to say that spending $10,000 or more is unnecessary. Of course, as De Beers’ inventory changed, they needed to update the criteria of what made a diamond valuable—since its value had nothing to do with the stone itself, and everything to do with De Beers’ extensive cultural engineering project.

In the mid-1950s De Beers was overwhelmed by a flood of small diamonds pouring out of recently discovered mines in the Soviet Union. After nearly a decade and a half of convincing America of the importance of larger stones, suddenly the company needed to create a virtue out of the previously disparaged small diamonds.

Where previously DeBeers had convinced people to buy bigger diamonds, the influx of smaller stones from Russia in the 1950s (the Siberian mines that, you’ll recall, helped keep the nuclear arms race going) led DeBeers to start emphasizing “the four C’s” that are still hoisted by jewelers as the primary means of judging a diamond’s worth. Besides its size (carat), DeBeers also promoted cut, clarity and color, in order to convince the public that a smaller diamond (like their diamonds from Russia) could be just as valuable as the larger diamonds they’d previously bought.

In so doing, DeBeers created the perfect currency for every warlord and rebel faction in Africa: valuable, small enough to smuggle (as the gun runner in the movie Lord of War tells the Liberian president based on Charles Taylor, “I’ll take the stones—I don’t think I can fit a tree trunk in my brief case), and not only something that is actually quite common in nature, but is found most easily in Africa itself. “Blood diamonds” first emerged in Angola’s civil war, but have been used in Sierra Leone and Liberia, the Ivory Coast, and the Congo by such butchers as Charles Taylor. In Africa, diamonds are no longer simply financing wars; they are the cause of war themselves.

We must be clear about who is involved. Barbaric, drug-crazed and dragooned by the warlords as they may be, armed and desperate young men could not have brought Unamsil to its knees all on their own. The UN has been ensnared by something different, something newer and more insidious: by a struggle between two rival groups supported by businessmen intent on gaining control of mineral wealth. By refusing to declare an embargo on diamonds from Sierra Leone, or indeed the economic exclusion zone that many experts have been calling for, the Security Council and UN Secretary General have left the field wide open for a mafia-like conflict in which their soldiers have become pawns in the game.

As media attention has grown on the issue of blood diamonds—including a Leonardo di Caprio movie being released this weekend—DeBeers has grown genuinely frightened. After all, with little intrinsic value, the diamond industry is almost entirely a carefully constructed cultural delusion that DeBeers maintains through marketing alone. Comemmorating one’s love with the currency used to pay for atrocities is the kind of revelation that could threaten DeBeers’ house of cards, so they have introduced a number of programs to “prove” to customers that their diamonds were never part of a gun runner’s payment.

While the company seems to be winning this particular PR battle, its uneasy effort to tiptoe through the Angolan minefield exemplifies the problem De Beers faces as it simultaneously tries to open up and to wield the monopolistic powers of the old De Beers. Throughout my trip to Africa, I was confronted with evidence of this schism. Even as the company openly exhibited its expansion plans and granted access to its mining operations, it displayed the secrecy and stifling control for which the old De Beers was famous. Every minute of every day was rigidly scheduled. There was little room to escape, to veer from the confines of De Beers’ yellow-brick road and seek the company behind the curtain.

To counter the release of the movie Blood Diamond, DeBeers has launched a campaign to tout the “Kimberley Process,” a certification program they use to prove that a given diamond has come directly from the mine. Unfortunately, the “Process” is little more than a rubber stamp. While DeBeers has put a great deal of effort into pacifying the conscience of the public, they have done nothing to address the issue itself.

In July 2000, after millions of deaths fueled by diamonds, Global Witness created enormous pressure on the global diamond industry to force their participation with other NGOs, governments, and the UN to create a policy toward “conflict diamonds" called the Kimberley Process Certification System. This system was formally adopted in 2003 to decrease the number of “conflict diamonds" entering the legitimate diamond supply chain. Participating countries belonging to the Kimberley Process claim that rough diamonds originating within their borders are not directly used to finance rebel militias. There is little to no oversight for these “recognized" governments, and often little incentive for governments to claim otherwise. Some estimates say that up to 30% of the rough output of some diamond mines is smuggled out illegally.

The diamond industry also adopted a voluntary System of Warranties with no independent monitoring to claim that their diamonds do not originate from conflicts. These warranties are rarely kept - in a survey conducted in February 2006, Amnesty International found that only 18% of retailers had a policy toward ensuring their diamonds were compliant with the Kimberley Process.

Of course, even if the “Kimberley Process” were effective at its stated aims, it would only ensure that a specific diamond was not actually part of a warlord’s cache at some previous point in its history. It would still do nothing to change the fact that the purchase of the diamond supports the cultural construction of the diamond that DeBeers has so carefully created. Purchasing a diamond—any diamond—adds to the social pressure and prestige that DeBeers created from whole cloth, and in so doing, any diamond purchase increases the value of all diamonds.

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