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Volume 10, Number 11
Are Diamonds Really Forever?
by Murray N. Rothbard
The international diamond cartel, the most successful cartel in history, far more successful than
the demonized OPEC, is at last failing on hard times. For more than a century, the powerful
DeBeers Consolidated Mines, a South African corporation controlled by the Rothschild Bank in
London, has managed to organize the cartel, restricting the supply of diamonds on the market
and raising the price far above what would have been market levels.
It is not simply that DeBeers mines much of the world's diamonds; DeBeers has persuaded the
world's diamond miners to market virtually all their diamonds through DeBeer's Central Selling
Organization (CSO), which then grades, distributes, and sells all the rough diamonds to cutters
and dealers further down on the road toward the consumer.
Even an unchallenged cartel, of course, does not totally control its price or its market; even it is
at the mercy of consumer demand. One of the reasons that diamond prices and profits are
slumping is the current world recession. World demand, and particularly consumer demand in
the U.S. for diamonds, has fallen sharply, with consumers buying fewer diamonds and
downgrading their purchases to cheaper gems, which of course particularly hits the market in the
But how could even this degree of cartel success occur in a free market? Economic theory and
history both tell us that maintain- ing a cartel, for any length of time, is almost impossible on the
free market, as the firms who restrict their supply are challenged by cartel members who secretly
cut their prices in order to expand their share of the market as well as by new producers who
enter the fray enticed by their higher profits attained by the cartelists. So, how could DeBeers
maintain such a flourishing, century-long cartel on the free market?
The answer is simple: the market has not been really free. In particular, in South Africa, the
major center of world diamond production, there has been no free enterprise in diamond mining.
The government long ago nationalized all diamond mines, and anyone who finds a diamond mine
on his property discovers that the mine immediately becomes government property. The South
African government then licenses mine operators who lease the mines from the government and,
it so happened, that Io and behold!, the only licensees turned out to be either DeBeers itself or
other firms who were willing to play ball with the DeBeers cartel. In short: the international
diamond cartel was only maintained and has only prospered because it was enforced by the South
And enforced to the hilt: for there were severe sanctions against any independent miners and
merchants who tried to produce "illegal" diamonds, even though they were mined on what used
to be private property. The South African government has invested considerable resources in
vessels that constantly patrol the coast, firing on and apprehending the supposedly pernicious
Back in the pre-Gorbachev era, it was announced that Russia had discovered considerable
diamond resources. For a while, there was fear among DeBeers and the cartelists that the
Russians would break the international diamond cartel by selling in the open market abroad.
Never fear, however. The Soviet government, as a professional monopolist itself, was happy to
cut a deal with DeBeers and receive an allocation of their own quota of diamonds to sell to the
But now the CSO and DeBeers are in trouble. The problem is not only the recession; the very
structure of the cartel is at stake, with the problem centering on the African country of Angola.
Not that the communist government (or formerly communist, but now quasi-communist,
government) refuses to cooperate with the cartel. It always has. The problem is threefold. First,
even though the Angolan civil war is over, the results have left the government powerless to
control most of the country. Secondly, the end of the war has given independent wildcatters
access to the Cuango River in northern Angola, a territory rich in diamonds. And thirdly, the
African-drought has dried up the Cuango along with other rivers, leaving the rich alluvial
diamond deposits in the beds and on the banks of the Cuango accessible to the eager prospectors.
With the diamond deposits available and free of war, and the central government unable to
enforce the cartel, 50,000 prospectors have happily poured into the Cuango Valley of Angola.
Furthermore, the prospectors are being protected by a private army of demobilized but armed
Angolan soldiers. As one Johannesburg broker pointed out, "If you fly a patrol over the province
you can get shot down by a missile. And it's a 100-mile river. You can't put a fence around it."
So far, DeBeers has been holding the line by buying up the "over-supply" caused by the influx of
Angolan diamonds; this year, the cartel may be forced to buy no less than $500 million in "illegal"
Angolan diamonds, twice as much as that country's official output. Consequently, DeBeers is
taking heavy losses; as a result, Julian Ogilvie Thompson, the arrogant and aristocratic chairman
of DeBeers, was forced to announce that the company was slashing its dividend, for only the
second time since World War 11. Immediately, DeBeers' shares plummeted by one-third, taking
with it much of the Johannesburg Stock Exchange.
Overall, DeBeers's CSO had to purchase $4.8 billion of rough diamonds in 1992, while being able
to sell only $3.5 billion. This huge pileup of inventory could break the cartel price; to stave off
such a perceived disaster, DeBeers ordered cartel members to cut back 2 5 97o on the diamonds
they had already contracted to market through the cartel. Such a large cutback sets the stage for
individ- ual firms to sneak supplies into the market and evade the cartel restrictions.
that Sir Harry Oppenheimer, the octogenarian head of DeBeers, decided to "vacation" in Russia
at the end of August, presumably to persuade the Russians to resist any temptation to engage in
free-market competition in the diamond market. With luck, however, the forces of free
competition-as well as the world's consumers of diamonds-may triumph.
* * * * *
Murray N. Rothbard was professor of economics at the University of Nevada, Las Vegas, and vice-president of academic affairs for the Mises Institute.