There seems to be something about diamonds which leads to monopolistic business practices. The U.S. Supreme Court has repeatedly held that baseball is a sport and not a business, and therefore is not subject to federal antitrust laws. That is outrageous enough, and may be the subject of a future column, but today I want to look at some of the business practices surrounding the other type of diamond, crystallized carbon.

     This subject comes up because De Beers has recently opened its first retail shop in the United States. De Beers is the cartel which controls approximately two thirds of the uncut natural diamonds in the world. By artificially restricting the supply of diamonds, and by its skillful use of advertising, political contributions, graft, and other unsavory (and sometimes illegal) practices, De Beers has managed to maintain an artificially high price for diamonds for well over a century now.

     Prior to 1870, diamonds were genuinely rare. In that year, however, huge diamond "pipes" were discovered in South Africa, and the market was suddenly flooded with large quantities of diamonds. The wealthy British investors in the mines quickly realized that the price of diamonds would plunge drastically, because the price depended almost entirely on scarcity. The owners of the diamond mines decided to combine their interests into a single entity that could control production and perpetuate the myth that diamonds were still scarce and valuable. They merged their separate interests into De Beers Consolidated Mines, Ltd., which was incorporated in South Africa. De Beers then took over all aspects of the world diamond trade. At its height, it owned or controlled all the diamond mines in southern Africa, and also owned diamond trading companies in England, Portugal, Israel, Belgium, Holland and Switzerland. It has artificially maintained a high price for diamonds by strictly limiting the number of new diamonds which reach the market each year, and by manipulating public policy and perceptions around the world. The number of diamonds released for sale each year is far smaller than the number which are mined. As a result, De Beers has a huge inventory of cut and uncut diamonds which it is holding in its vaults, and off the market.

     Despite its huge success in keeping the price of diamonds high, there are some fundamental problems with the idea that the prices will remain high in the future. First, gem diamonds do not get used up, so with very few exceptions, every diamond that has been cut into a gem since the beginning of time still exists today. The supply keeps getting larger and larger. It is conservatively estimated that the public holds more than five hundred million carats of gem diamonds. That is more than fifty times the amount of gem diamonds produced by De Beers in one year. If even a small percentage of diamond owners were to put their diamonds on the market, the price would plunge drastically.

     Another problem threatening the high price of diamonds is the increasing availability of real but artificially created diamonds. The technology is improving, and the prices of artificial diamonds are coming down. Only a sophisticated lab can tell the difference between a natural and an artificial diamond. The availability of these indistinguishable alternatives, which are not controlled by De Beers, exerts downward pressure on the price of natural diamonds.

     Many people are attracted to diamonds because they believe that they can sell the diamond for the same price they paid for it. Most diamond retailers will not agree to buy their own diamonds back from their customers, and of those who will, many will only do so at a price which is discounted by fifty percent or more. Businesses do exist which specialize in purchasing diamonds from retail customers, but the customers are often shocked to learn that they can only get back one half or even less of the price they paid at retail. Natural diamonds are not all created equal, and even certified appraisers often disagree about the qualify of a given stone, and this can also affect the price. Most diamond retailers are dependant on De Beers for their inventory, and also benefit from the high prices of diamonds. The difficulty of selling back your diamonds is intended to help keep large numbers of people from selling their diamonds, and destroying the existing high retail prices.

     Another important aspect of the diamond trade is blood diamonds, the stones which are produced, sometimes with slave labor, in war zones like Liberia and Sierra Leone. Because of the success of the De Beers cartel, diamonds are very valuable in today’s market. This creates a strong incentive for local war lords to fight over the control of diamond mines. Millions of people have suffered the devastating effects of war in these regions, including starvation, diseases, maiming, slavery, rape and death.

     The current international agreement for dealing with blood diamonds is called the Kimberly Process, and it calls for diamonds from non-war zones (De Beers controlled mines) to be marketed with certificates of origin, and for diamonds without certificates to be excluded from international trade. The Kimberly Process is doomed to fail, and is failing. Blood diamonds are still routinely reaching international markets, and the diamond wars continue to rage. The problem is that the Kimberly Process is primarily designed to help bolster the De Beers cartel, by eliminating from the market those diamonds which De Beers does not control. This helps to keep the price of diamonds high, and fuels the incentive for the diamond wars. International boycotts have never been able to eliminate a black market in high value goods, whether it be Saddam Hussein’s oil, or African ivory, or grizzly bear gall bladders. The Kimberly Process does far more to protect De Beers than it does to eliminate the diamond wars.

     To attack the problem of blood diamonds at its source, it is necessary to break up the De Beers cartel. It should be broken up into a bunch of smaller companies, each with a proportionate share of diamond mines and hoarded diamonds, and each required to compete with the others in a competitive market. This could be done through enforcement of antitrust laws in Europe and South Africa. The price of diamonds on the international market would drop precipitously, and the profit motive for the diamond wars would drop along with it. Instead of protecting the De Beers cartel, we would force the diamond producers into real competition, and suck the fuel out of the diamond wars at the same time.