Blood Diamonds (16 page)

Similar in many ways to the California Gold Rush, the South African diamond rush lured hundreds, then thousands of prospectors to South Africa's scrappy farmland, usually men and families with few other viable opportunities who were enticed by the dream of instant wealth that, for many, turned out not to be dreams at all.

Southey's comment to legislators would have been equally accurate if he'd said the stone would also be the foundation for the world diamond industry. But he couldn't possibly have guessed that the serendipitous discovery would lead, over the course of the next century, to the creation of one of the most successful commodities monopolies in world history and, as a result, to brutal warfare over natural resources that would plunge at least three African states into chaos, poverty, and destruction at the end of the twentieth century.

The harbinger of that course of history came marching across the South African scrub flats that were quickly vanishing beneath the swiss-cheese landscape of diamond pits in 1871 in the form of an 18-year-old boy in cricket flannels carrying a bucket and a shovel. When Cecil Rhodes arrived in Africa from England, the rush was already on, not only along the Orange River but also in the Vaal River valley farther north, at the end of a torturous 700-mile overland journey from Cape Town. He found a chaotic, disorganized chain of tent communities populated by vagabond diggers, many of whom didn't even know what a diamond looked
like, but who had been lured to the fields by tales of vast riches. They scratched away the land with the fervent hope that eternal wealth lay just below the next crust of earth. Indeed, sometimes it did. In his book
The World of Diamonds: The Inside Story of the Miners, Cutters, Smugglers, Lovers and Investors,
Timothy Green writes: “‘An English gentleman,' reported one visitor to the diggings, ‘having worked a claim for six months and found nothing, went home disgusted, giving away his claim. The man who got it found on the same day a fine diamond of 29½ carats before he had gone six inches deeper than his predecessor. I believe he was offered 2,500 [pounds] for it.'”

Rhodes pitched his tent at a site called New Rush, a diamondiferous hillock near a farm that was purchased by diggers for 6,000 pounds from local farmers Johannes and Diedrich De Beer. The brothers were disgusted by the mining activity that was wrecking the farmland and wanted to move to more peaceful environs. This little knot of land would achieve everlasting fame over the course of the next century as Kimberley Mine, also called the Big Hole—the deepest open pit mine ever dug by human hands. The mine eventually reached into the earth over 1,300 feet, following a snaking kimberlite pipe that has yielded some of the best and most valuable diamonds ever discovered. The mine was named after the British colonial secretary of the day—not for the kimberlite that produced the diamond wealth—because he couldn't pronounce either Colesburg Kopje, the name of the hill, or Vooruitzigt, the name of the estate where it was located. And he refused to call it De Beers New Rush, as it was known locally among the diggers, because he deemed the name wholly undignified for a community under the dominion of Queen Victoria.

By 1880, South Africa had far surpassed the annual diamond production of Brazil, churning out over 3 million carats per year. Diamond
production, whether it's done legally or illicitly, seems to always have global ripple effects, and at the close of the nineteenth century most of them were positive. The surge of diamonds on the world market spurred industrial growth in the United States and Germany, who were huge customers for industrial-quality diamonds. The European cutting and polishing industry was pulled out of a slump caused by declining Brazilian production, and Antwerp, Belgium, became as much of a boomtown as Kimberley, quickly boasting of forty businesses that specialized in cutting and polishing stones. The price of diamonds during the early years of the rush remained surprisingly stable.

But Rhodes knew that this economic stability wouldn't last forever. He was clearly different from the majority of other prospectors, whose definitions of “wealth” often didn't extend beyond the scopes of their own lifetimes. Rhodes wanted an empire.

He quickly realized that there was a lot of wealth in the South African soil to go around, too much in fact. He was smart enough to know that if all the claims that were producing good finds continued to do so, it wouldn't be long before there were too many diamonds in circulation, hurting everyone by dragging down prices. Therefore, his goal became not to just find as many high-quality rocks as possible in his lifetime—which was essentially the goal of 90 percent of those digging in South Africa at the time—but to buy as many claims as possible that may contain those diamonds. By controlling the land, he could control the production. And by controlling the production, he could ensure that there were just enough diamonds on the market to meet demand, thereby keeping prices high and stable.

Over the course of the next decade, he did just that, trading and consolidating his holdings through dozens, then hundreds of arrangements with miners who didn't have his patience or forethought.
By the early 1880s, he was a majority stakeholder in the De Beers Mine, one of the area's most prolific.

Keeping pace with the growing number of acres under Rhodes's control was his obsession with power and market dominance. “When I am in Kimberley, I often go and sit on the edge of the [nearby] De Beers Mine and I reckon up the value of the diamonds in the blue and the power conferred by them,” he once wrote of the blue kimberlite that seemed to be under every acre of dirt in Kimberley. “Every foot of the blue ground means so much power.”

It's hardly surprising, given his admission that he often communed with the pit in the way many people commune with their lovers, that he named his empire De Beers after the mine in which he owned a majority stake.

Unfortunately for Rhodes, the De Beers Mine wasn't the only treasure trove in the region. Nor was Rhodes the only prospector staring into the gravel with visions of titanic fortunes. Once South Africa began producing its superb diamonds, gem houses all across Europe dispatched their best men to the country to claim a bit of it for themselves. Among the competitors was a treacherous man known as The Buccaneer, who often tried to sabotage Rhodes; Alfred Beit, a quirky financial wizard who soon joined Rhodes's burgeoning company; and Francis Gould, a majority stakeholder in the Kimberley Mine with excellent financial contacts in London. And there was Barney Barnato, a Cockney odd-jobber who rushed to South Africa to sell cigars once word of the good times reached him in London.

There are few historical clues regarding the fate of Barnato's cigar business, other than that it obviously didn't last long. He soon began buying and selling diamonds, aided immensely by his working-man image and his generally good demeanor. He and his
brother used the proceeds from their sales to buy up small kimberlite claims and began digging like crazy, under the auspices of the Barnato Diamond Mining Co. The blue ground was good to them and they wisely kept investing their returns in more and more claims, finally buying into Francis Gould's Kimberley Central Mining Co., a purchase that instantly gave them as much clout as Rhodes. Barnato owned as much of the Kimberley Mine as Rhodes did of the De Beers Mine. In ten years, Barnato had morphed from a hustler hawking smokes to one of the richest diamond entrepreneurs in Africa.

Rhodes took this development as any fanatical businessman bent on market domination would—as an act of economic war. His goal became to own the Kimberley shares of Barnato's company and Kimberley's other major stakeholder, Compaigne Francaise des Mines de Diamant de Cap de Bon Esperance (otherwise shortened locally to a far simpler moniker: The French Company). What followed was one of the most astute and far-reaching corporate takeovers in the history of business. In the mid-1880s Rhodes made an offer to buy The French Company's stake in the Kimberley Mine that Barnato quickly countered. A compromise was worked out; Rhodes would buy The French Company's claims and immediately sell them to Barnato in exchange for a one-fifth stake in the Kimberley Mine. With a foot in the door at the region's best mine, Rhodes then furiously began buying every other Kimberley Central share that he could find, a buying frenzy that spurred Barnato to follow suit, ratcheting up prices to obscene levels. But Rhodes was more astute than Barnato: He was offering Barnato's own shareholders lucrative holdings in a new company that he promised would control the world's diamond supply—and by extension, the world's diamond prices.

Like African rains that eventually pounded powerful volcanoes down to mere scrub flats, Rhodes systematically hammered away at Barnato's resolve until he saw that surrender was imminent. Barnato, now the largest shareholder, put Kimberley Central into voluntary liquidation and Rhodes bought all the company's assets with one check, the largest ever written at that time: $12.8 million. In exchange, Barnato was given the largest shareholding and a lifetime governorship in Rhodes's new company, De Beers Consolidated Mines, Ltd., incorporated on March 13, 1888.

At age 35, Rhodes now controlled 90 percent of the world's diamond production.
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OVER THE COURSE of the twentieth century, De Beers pursued a plan that was as simple as it was ruthless: Buy as much of the world production as possible and tightly control global distribution through its London offices. Since diamonds suddenly became far less rare as a result of the South Africa boom, price controls were needed to maintain their value. The trick, in other words, was to turn something that should have been relatively cheap into something verging on priceless. Doing that meant controlling the supply and creating a demand. The company could control the prices of the stones during economic downturns—such as in the wake of both world wars—by curtailing either production or distribution, carefully keeping the supply of stones on the market in line with demand.

De Beers had a hand in nearly every diamond mine in the world and agreements with all the major producers and brokers to sell their stones only to them. What developed was a cartel of diamond producers, buyers, and sellers overseen by De Beers, which took on the role of “market custodian” for rough goods bought
and sold throughout the world. That way, De Beers could sell the stones to a small clique of hand-selected “sightholders,” or preferred customers, at regular “sights” held ten times a year. Amazingly, the sightholders agreed to buy the gems at a price set by De Beers without ever laying eyes on the stones. Sometimes, sightholders got a real gem of a package, so to speak; other times they got diamond chips not worth the price they paid. Of course, they could refuse to pay, but they'd never be invited back to another sight.

This business plan meant that the company had to keep up with where diamonds were being discovered. If diamonds were making their way to the retail market outside their channels, it would play havoc with the price controls. A few times, De Beers narrowly averted economic disaster; in 1902, tales began to circulate about a rich find near Kimberley being mined, but the early reports were dismissed as inaccurate or outright lies. Scam artists often “salted” their claims with real diamonds in the hopes that someone like De Beers would swoop in and pay a huge sum for what would turn out to be a worthless field. But the talk persisted about this particular mine and finally De Beers's governor Alfred Beit went to investigate. When he arrived at Premier Mine, he is reported to have been so shocked by the quality of the diamonds being pulled out of the ground in front of his eyes that he suffered a stroke on the spot.
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Naturally, De Beers ended up owning the mine.

Over the decades, it ended up owning a lot of mines, so many in fact that their combined production would have toppled the gems' price years ago. De Beers solved that problem by simply limiting the amount of stones sold to its sightholders, amassing over the course of the past 100 years a stockpile of diamonds in a vault at the DTC worth $4 billion. At the artificial price, of course.
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The other economic sleight of hand the corporation had to simultaneously perform was to manufacture a need and desire for its products. After all, owning the vast majority of a commodity is only good if that commodity is worth something, and aside from their limited manufacturing applications, diamonds are good for next to nothing. Their only intrinsic value is that they're very hard and well suited to cutting other very hard things, a characteristic that translates into a mere $30 per carat. Therefore, another pillar of De Beers's price-control system was manufacturing a demand for a product that is essentially worthless to retail consumers. Part of that strategy was to generate and maintain the myth that diamonds are both rare and necessary for people who fall in love.

Diamonds themselves do a good amount of the work in this regard: The gems are beautiful. What make them so precious are the hardness, clarity, and ability to absorb and recast light in sparkling tones. But diamonds aren't born beautiful. Most rough is less attractive than dime-store marbles. It takes the talent of the world's cutters and polishers to produce stones worthy of the empire they represent. Once walked out of the DTC's Charterhouse Street doors, the diamonds are dispersed around the world to have their values exponentially increased during each remaining step leading to the final consumer.

Before any diamond is worthy of any bride—to say nothing of the price the groom will pay for it—it must first be cut, and the first and most important cut is called the cleave. Diamonds are composed of layers, which make up a stone's grain. Although they are indeed the hardest known substance in nature, it's a mistake to think that they can't be broken because they can be cleaved along their planes. In the 1500s, French King François, a sponsor of navigator Jacques Cartier, devised a disastrous method of testing stones sent back by the explorer and thought to be diamonds: He smashed
them against an anvil to see if they could withstand the blow, and it's not unlikely that many good stones were shattered and kicked away as quartz. Cleavers now use lasers and high-speed diamond-dusted saws to create the “cleavage cut,” but before the advent of modern technology, cleavers would rub one diamond against another to produce a groove on the diamond to be cut wide enough to fit the blade of a cleaving knife. The person performing the surgery would give the knife a good rap and the stone would either break in two or be destroyed.