De Beers: A Free-Market Cartel?

Rhodes was one of several businessmen responsible for representing De Beers in the Griqualand West Miners' Union (1886-8) and helped secure the election, among others, of a minister in the department of Crown Lands and Public Works, John Merriman, who from that moment on looked favourably on the company. Earlier, Rhodes had manipulated political connections to secure for De Beers in 1884 a steady supply of convict labour and used closed compounds, as well as domination of the Mining Board, whose drainage and reef clearance services it employed, to the chagrin of its rivals at Kimberly Central, at little to no cost to itself. Rhodes was "extremely effective in promoting legislation that was favorable to the diamond and gold mining companies -- most notably in ensuring that the burden of taxation on the diamond industry was kept low" (p. 33).

 

Furthermore, De Beers, following the early 1890s recession, began receive much in funds from N. M. Rothschild & Sons, a London bank that made its name by pumping cash for imperial powers. As Niall Ferguson puts it in The House of Rothschild: The World's Banker, 1849-1999,

For most of the nineteenth century, N. M. Rothschild was part of the biggest bank in the world which dominated the international bond market. For a contemporary equivalent, one has to imagine a merger between Merrill Lynch, Morgan Stanley, J P Morgan and probably Goldman Sachs too — as well, perhaps, as the International Monetary Fund, given the nineteen-century Rothschild's role in stabilising the finances of numerous governments. (p. 479)

N. M. Rothschild supplied coin to post-Napoleonic Prussia, to the Bank of England,  and to Britain for its acquisition of the Suez canal. It handled the issue of bonds by various European powers during the Crimean war, the payment of French reparations to Germany after the Franco-Prussian war, and issued no less than £267 million in US bonds between 1873 and 1877 to stabilize US finance and aid the adoption of the gold standard. Ferguson in The World's Banker: The History of the House of Rothschild quotes Nathan Meyer Rothschild himself as saying in 1817, "'My business [...] consists entirely in Government transactions & Bank operations" (p. 2). If ever there was a case of industry at the beck and call (as well as the teat) of the State, this was it.

 

The Rothschilds took a keen interest in consolidating precious metal mines. Ferguson records the ways in which they won monopoly contracts from imperial powers in The World's Banker:

In 1889, they [the Rothschilds] [...] floated the Burma Ruby Mines company after a prolonged tussle to secure a seven-year mining concession from the British government, which had annexed the territory three years before. This proved [a] profitable enterprise: the price of rubies was still rising strongly four years later (in marked contrast to the price of diamonds). (p. 879)

Alphonse [James de Rothschild] and his brothers acquired a 25 per cent interest in the Nickel Company set up by the Australian entrepreneur John Higginson on the French-owned island of New Caledonia. The strategy here was ambitious -- by 1884, the company had acquired most European nickel refineries -  but the discovery of nickel mines in Canada in 1891 shattered the dream of a nickle monopoly [...]. (p. 880)

Aside from its generally high profitability, part of the appeal of the mining empire the Rothschilds acquired in the 1880s and 1890s lay in its apparent freedom from political control. Once a concession had been granted or a piece of territory sold, mining companies seemed to enjoy something close to complete autonomy, especially when the mines were in remote locations, as they often were, or in parts of the world with relatively rudimentary state structures. (p. 881)

In 1882, Kimberly Central was the main diamond mining centre and De Beer's main rival. "Kimberly and the surrounding land had been annexed by Britain in 1871" (p. 884). By 1889, De Beers had acquired 93 percent of Kimberley's capital, "so that the final purchase of the Central cost less than a tenth of its valuation at £5.3 million. Thereafter, it was a relatively easy matter to mop up the remaining small companies" (p. 883). Cecil Rhodes, a director and majority shareholder in De Beers, "had begun to realize that [...] whoever secured the financial backing of a major city house would win" the battle for takeover of the diamond industry (p. 882). Enter the Rothschilds. Within a number of years,

the Rothschilds had acquired a substantial stake in the new firm and thus a substantial financial hold over Rhodes [...]. By 1899, N. M. Rothschild & Sons were the second biggest shareholder in De Beers (with 31,666 shares) [...]. Rhodes had only 13, 537 [...]. It was to prove a superb investment. (p. 883)

When WWI came around, "the Rothschilds gained in one or two isolated respects from the [conflict] -- which boosted demand for Vickers' guns, New Caledonian Nickel and De Beers' Diamonds" (p. 981).

 

Interestingly enough, in De Beers' early years it remained true for some time that the "one strategy which the Rothschilds firmly opposed was any kind of hoarding of diamonds" (p. 884). As Nathan Rothschild told Rhodes in July 1891,

"[A]s regards the disposal of the diamonds [...] the more I think of it the more I feel convinced that you cannot do better than follow the ordinary laws of supply and demand and avoid, as far as possible, all artificial means, combinations, accumulations, etc., etc."

One may speculate as to the ultimate efficacy of that stricture.
 

But beyond this, the essential point about De Beers is that, as Janine Roberts writes in Glitter and Greed: The Secret World of the Diamond Empire, it was "from the first the ultimate 'imperial company' [...] founded by Cecil Rhodes to fund the extension of the British empire" (p. 83):

[Rhodes] believed England was destined to rule Africa: "I contend that we [the English] are the first race in the world and the more of the world we inhabit, the better it is for the human race." An early version of [Rhodes'] will left funds to regain North America for the British Empire. [...]

[De Beers' diamond sales] helped finance his attack on the Transvaal's Boer government in 1895. De Beers' oil wagons smuggled guns past the Boer police on an ill-fated raid on gold-rich Johannesburg. His "Charter Company," also known as the "British South Africa Company," had a charter allowing it to maintain a standing army and administer conquered territory. De Beers financed it with diamonds and  held a quarter of its stock. His companies soon controlled half of South Africa's exports. (p. 84)

Among the principle early challengers to De Beers was a German mine founded by means of violent colonial occupation:

In South West Africa the Germans had claimed rights over thousands of diamonds that were literally lying sparkling in the moonlight. The Germans employed local blacks to crawl all night in a line over the dunes putting diamonds into tins hung from their necks. Their mouths were gagged lest they try to keep a diamond by swallowing it. In 1909 the Germans set up the German Colonial Company to mine its diamonds. De Beers' share of the world market slipped down to 40 percent.

The German Colonial Company established a forbidden zone or "Sperrgebiet" along the diamond-rich coast of  South West Africa, excluding the local people from their own land. (p. 86)

In 1917, Ernest Oppenheimer, a member of the London Syndicate which shipped and distributed De Beers diamonds and the owner of marketing rights to the Premier Mine -- famous for its 1905 discovery of the Cullinan diamond -- started a new company called "Anglo American", based in South Africa to elude anti-German resentment, with the help of various directors including representatives of J. P. Morgan. (As Edward J. Epstein notes, the discoverer of the mine, Thomas Cullinan, sold a majority interest to the Transvaal government to raise capital.) Unlike Rhodes, Oppenheimer was interested not in spreading British imperial rule, but solely in acquiring domination of the world diamond market. After the Versailles Peace Conference of 1919, the extraordinarily lucrative German mine in South West Africa was almost certain to be forfeited to the British Crown. Oppenheimer moved quickly and pulled some strings:

Quite remarkably, the Germans were allowed to retain their title -- and to sell this to Ernest Oppenheimer's disguised German company, Anglo American. Prime Minister General Botha then agreed to sign over to this new company the diamond profits forfeited by the German Government to South Africa. [...] Oppenheimer's German connections might have been a problem earlier -- but they now proved to be his greatest asset [...]. (p. 88)

Oppenheimer then used his clout as a recently elected Member of Parliament for Kimberly to convince the German government to sell the diamonds via Anglo American. "He pointed out that it would allow him to manipulate the diamond production of other nations in order to protect South Africa [...]. The South African government  then gave Oppenheimer a pretext for bidding against the Syndicate for marketing rights" (p. 90-1). A heated row ensued between the Syndicate and De Beers; in the end, Oppenheimer would set up his own South African-based syndicate. The Minister of Mines was positively jolly at the sight of London-based conglomerates having their rear ends handed to them, but the government had no intention of foregoing a fair share of the cut:

It introduced [in 1925] the Diamond Control Act "to provide for the control of the sale and export of diamonds and for the establishment of a diamond control board in the Union." It took the power to fix diamond quotas and minimum prices, to demand and receive diamonds from producers, and to create a monopoly for both diamond sales and exports. (p. 92)

Oppenheimer had drafted the amendment himself. Anglo American at that time controlled about a quarter of world diamond production; it demanded a third from the Syndicate. In the end, it was victorious. "By October 22, 1925, all the major producers were signed up with the new Syndicate."

 

At this point, the newly-established diamond cartel (Anglo-American and De Beers) was here to stay, and did not blush from exercising the explicit grants of monopoly violence it enjoyed from its alliance with the State. Hundreds of small-time diamond miners rushed to Africa's Atlantic coastline after vast new alluvial diamond fields were discovered in the Western Transvaal in Lichtenburg. To protect the new Syndicate, the Precious Stones Act of 1927 was passed, which

made it illegal for anyone to be found in possession of diamonds not registered with the police. All diamonds confiscated were to go to the Syndicate. This effectively made it impossible for any black to keep even a bit of kimberlite that might contain a diamond -- even if his floor was made of kimberlite, as in the homes of the black South Africans I visited in 1996. (p. 93)

That same year, the government also grabbed control of most of the 500-mile strip from South West Africa to the South African province Namaqualand along the Atlantic coast. It announced publically that it would reserve these deposits for the benefit of small-scale diggers, but claimed 60 percent of extracts. Blacks were also prohibited from owning diamond leases, and a limit was placed on the amount of black mineworkers a white employer could hire.

 

Meanwhile, after a number of buyouts and much lobbying, Ernest Oppenheimer discovered to his delight in 1929 that what formerly were two mining companies were now to be united into a single Diamond Corporation, owned by De Beers, and with Oppenheimer as the chairman. "From now on the Diamond Syndicate, De Beers, and Anglo American would be simply different aspects of his personal family empire" (p. 95).

 

The Great Depression soon hit. Oppenheimer found himself faced with the prospect of a dramatic freefall in the world price of diamonds. Writes Epstein,

According to [a confidential market analysis commissioned by De Beers], "During the years 1930 to 1932, there was a pronounced and steady decline in prices of approximately 50 percent."

Oppenheimer was also faced with the rather underhanded self-aggrandizement of the South African government, which permitted an expansion of production in its alluvial fields to mollify diggers and, more importantly, to raise revenues. Oppenheimer moved fast to cut production, persuaded the government to allow the set up a bogus front corporation in the United Kingdom to avoid paying tax, and charged his contracted mines extortionary sorting and marketing fees -- a much protested action. Furthermore,

[a]ccording to one United States government report, Oppenheimer was even considering dumping several tons of these diamonds into the North Sea to prevent them from reaching the market in the event that his company was forced into liquidation by his creditors.

[But] Oppenheimer was saved from having to implement this radical solution to the oversupply problem by the invention of the diamond grinding wheel. [...] Instead of jettisoning the small and poorly crystallized diamonds, called bort, into the sea, De Beers began crushing them into powder and supplying them to the automotive, aircraft and machine tool industry. With Europe rearming for war, millions of tons of this powder could be profitably each year. Oppenheimer immediately saw the potential of "Industrial diamonds."

In the end, writes Roberts,

[t]he South African government's unease led in 1934 to the creation of a Diamond Producer's Association under the government's chairmanship [probably the "nationalization" Rothbard was referring to], with it having the power of veto, since all the Association's decisions had to be unanimous. The Association was to set production quotas for the unrepresented Syndicate-contracted foreign mines, and thus protect South African mines from competition. [...]

The final result [...] was that Oppenheimer retained control over the marketing of southern African diamonds. [...] By 1934, Ernest Oppenheimer was Chairman of De Beers and Anglo American, Member of Parliament, and a Knight. (p. 96-7)

And the rest, as they say, is history. Epstein again:

Oppenheimer realized that controlling this vital supply of industrial diamonds was necessary to protect the power of his cartel. [...] To assure that [...] crucial mines in the Congo did not slip out of De Beers' control, Sir Ernest negotiated what amounted to a private treaty with the Belgian government. In return for guaranteeing that the Forminiere Mines would sell all its bort to a De Beers subsidiary in London called the Industrial Diamond Corporation, Oppenheimer agreed to provide the Belgian cutting industry with the lion's share of diamonds from all of De Beers' mines. London would have a complete monopoly on the distribution of diamond powder, and Antwerp, which employed some 20,000 cutters, would remain the preeminent center for cutting diamonds. [...] Pierre Crokaert, a Belgian financier whose family's banking intcrests were closely allied with those of Oppenheimer's, became a board member of De Beers and a deputy to Oppenheimer. He undertook the responsibility for regulating the production of diamonds from the Congo in accordance the quota set by De Beers. With the completion of this arrangement with the Belgians, De Beers became an international cartel.

To briefly summarize:

• Cecil Rhodes was a political entrepreneur. From 1882-3, he successfully recommended legislation that granted De Beers an essential land monopoly in South African mines. By 1884, he had secured a steady supply of convict labour, used closed compounds, and drainage and reef clearance services. He also made sure the tax burden on the diamond industry would be kept low, and helped secure the election of friends in high places. By 1887, De Beers was the sole owner of South African diamond mines.
• From the 1890s onward, Rhodes received steady funding from N. M. Rothschild & Sons,  prospectors in imperial diamond mines and paragons of multinational corporatist finance. By 1902, De Beers had acquired 90% of the worldwide market in diamonds.
• Ernest Oppenheimer, his main competitor, by 1919 had won several mine concessions from the German empire. Oppenheimer worked with the South African government by means of the Diamond Control Act of 1925, the Precious Stones Act of 1927, and the national Diamond Producer's Association to acquire De Beers, cartelize South African diamond production, and severely restrict both entry into the industry and the supply of diamonds.

It should be evident that, far from being a case of a cartel formed by the free interplay of market competition, the De Beers diamond racket was from the start an operation that served as part of the commercial arm of international Rothschild banking, and consolidated under the auspices of world empire. It never once expanded its market share through voluntary concessions from consumer demand, but rather from the use, implicit or explicit, of the State's ability to extract coercive levies, grant land concessions, and exercise a monopoly of violence. In the libertarian society, where the frugal and thrifty producer is free from aggression and at liberty to conduct his craft and serve his fellowman, such a cancerous and parasitical organization would scarce be possible. De Beers was and is not a free market cartel. De Beers, like just about every other case of sustained monopoly in history, owes its life and its prospects and whatever it retains of them today to its drooling and lollygagging before the feet of its unmistakable master: the State.