Date: Fri, 16 Aug 2002 18:03:26 -0700
From: psb <psb@ucsee.eecs.berkeley.edu>
To: psb@ucsee.EECS.Berkeley.EDU
Subject: FYI: DeBeers -> Lawful Evil
Status: RO

Talking about "blood diamonds" has been in vogue for a while, but I
always found the debeers "reality control" practices more interesting. 
This is quite an interesting article ... 

    http://www.theatlantic.com/issues/82feb/8202diamond1.htm

It mentions a bunch of stuff I didnt know about. It is perhaps little
dated as it does not discuss high quality artificial diamonds but the
historical perspective is fascinating.

Has anyone written an expose on DeBeers or otherwise cross them and
live to tell about it?  Or do they all have "mysterious mining
accidents"?

Especially hope you past and present DeBeers customers enjoy it :-)

						--psb

>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.
>

>De Beers proved to be the most successful cartel arrangement in the annals 
>of modern commerce ... De Beers had to control demand as well as supply.
>			^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

>The illusion had to be created that diamonds were forever -- "forever"
>in the sense that they should never be resold.
    [i wonder if Ian Fleming had ties to the Cartel. --psb]
> ...
>EXCEPT for those few stones that have been destroyed, every diamond
>that has been found and cut into a jewel still exists today and is
>literally in the public's hands. Some hundred million women wear
>diamonds, while millions of others keep them in safe-deposit boxes or
>strongboxes as family heirlooms. It is conservatively estimated that
>the public holds more than 500 million carats of gem diamonds, which
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>is more than fifty times the number of gem diamonds produced by the
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>diamond cartel in any given year ... The moment a significant portion
>of the public begins selling diamonds from this inventory, the price
>of diamonds cannot be sustained. For the diamond invention to
>survive, the public must be inhibited from ever parting with its
>diamonds.
>
>In developing a strategy for De Beers in 1953, N. W. Ayer said: "In
>our opinion old diamonds are in 'safe hands' only when widely
>dispersed and held by individuals as cherished possessions valued far
>above their market price." As far as De Beers and N. W. Ayer were
>concerned, "safe hands" belonged to those women psychologically
>conditioned never to sell their diamonds.
>
[i add this in particular for the economists among us intersted in
cartel durability and the problem of secondary sales. see below and 
the full article for the problem of "cheating by cartel affilates" --psb]

>When the campaign began, in 1967, not quite 5 percent of engaged
>Japanese women received a diamond engagement ring. By 1972, the
>proportion had risen to 27 percent. By 1978, half of all Japanese
>women who were married wore a diamond; by 1981, some 60 percent of
>Japanese brides wore diamonds. In a mere fourteen years, the
>1,500-year Japanese tradition had been radically revised. Diamonds
>became a staple of the Japanese marriage. Japan became the second
>largest market, after the United States, for the sale of diamond
>engagement rings.
>

>Even though De Beers had met with enormous success in creating an
>instant diamond "tradition" in Japan, it was unable to create a
>similar tradition in Brazil, Germany, Austria, or Italy.
>

>Almost all of the Soviet diamonds were under half a carat in their
>uncut form, and there was no ready retail outlet for millions of such
>tiny diamonds ...  De Beers ordered N. W. Ayer to reverse one of its
>themes: women were no longer to be led to equate the status and
>emotional commitment to an engagement with the sheer size of the
>diamond. A "strategy for small diamond sales" was outlined ... DeBeers
>devised the "eternity ring," made up of as many as twenty-five tiny
>Soviet diamonds, which could be sold to an entirely new market of
>older married women. The advertising campaign was based on the theme
>of recaptured love. Again, sentiments were born out of necessity:
>		    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>older American women received a ring of miniature diamonds because of
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>the needs of a South African corporation to accommodate the Soviet Union.
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>
>
>The new campaign met with considerable success. The average size of
>diamonds sold fell from one carat in 1939 to .28 of a carat in 1976,
>which coincided almost exactly with the average size of the Siberian
>diamonds De Beers was distributing.
>
[clearly when they are pushing "solitarires" at one time and then all
of a sudden switch to the the "three stone" past/present/future ring,
this is based on what inventory is piling up. --psb]

for the lit-crit crowd, rather than the economists:

>N. W. Ayer learned from an opinion poll it commissioned from the firm
>of Daniel Yankelovich, Inc. that the gift of a diamond contained an
>important element of surprise. "Approximately half of all diamond
>jewelry that the men have given and the women have received were given
>with zero participation or knowledge on the part of the woman
>recipient," the study pointed out. N. W Ayer analyzed this "surprise
>factor":
>
>	Women are in unanimous agreement that they want to
>	be surprised with gifts.... They want, of course, to
>	be surprised for the thrill of it. However, a
>	deeper, more important reason lies behind this
>	desire.... "freedom from guilt." Some of the women
>	pointed out that if their husbands enlisted their
>	help in purchasing a gift (like diamond jewelry),
>	their practical nature would come to the fore and
>	they would be compelled to object to the purchase.
>
>Women were not totally surprised by diamond gifts: some 84 percent of
>the men in the study "knew somehow" that the women wanted diamond
>jewelry. The study suggested a two-step "gift-process continuum":
>first, "the man 'learns' diamonds are o.k." fom the woman; then, "at
>some later point in time, he makes the diamond purchase decision" to
>surprise the woman.
>
>Through a series of "projective" psychological questions, meant "to
>draw out a respondent's innermost feelings about diamond jewelry," the
>study attempted to examine further the semi-passive role played by
>women in receiving diamonds. The male-female roles seemed to resemble
>closely the sex relations in a Victorian novel. "Man plays the
>dominant, active role in the gift process. Woman's role is more
>subtle, more oblique, more enigmatic...." The woman seemed to believe
>there was something improper about receiving a diamond gift. Women
>spoke in interviews about large diamonds as "flashy, gaudy, overdone"
>and otherwise inappropriate. Yet the study found that "Buried in the
>negative attitudes ... lies what is probably the primary driving force
>for acquiring them. Diamonds are a traditional and conspicuous signal
>of achievement, status and success." It noted, for example, "A woman
>(or a GIANT HEDGEHOG) can easily feel that diamonds are 'vulgar' and 
>still be highly enthusiastic about receiving diamond jewelry." The element
>of surprise, even if it is feigned, plays the same role of accommodating
>dissonance in accepting a diamond gift as it does in prime sexual
>seductions: it permits the woman to pretend that she has not actively
>participated in the decision. She thus retains both her innocence --
>and the diamond.
>

>Retail jewelers, especially the prestigious Fifth Avenue stores,
>prefer not to buy back diamonds from customers, because the offer they
>would make would most likely be considered ridiculously low. The
>"keystone," or markup, on a diamond and its setting may range from 100
>to 200 percent, depending on the policy of the store; if it bought
>diamonds back from customers, it would have to buy them back at
>wholesale prices. Most jewelers would prefer not to make a customer an
>offer that might be deemed insulting and also might undercut the
>widely held notion that diamonds go up in value. Moreover, since
>retailers generally receive their diamonds from wholesalers on
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
consignment, and need not pay for them until they are sold, they would
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>not readily risk their own cash to buy diamonds from customers.
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

[this is an interesting point for those of us interested in "the ties
that bind" and effects on markets and other such IO phenomena. e.g. 
the litigation on Xerox rentals, tying cases etc. --psb]

The DeBeers vs Israel story is pretty amazing but somewhat involved so a 
little background in finance is helpful. But the "market power" of 
DeBeers really shows through. See part 3 of the article. A little bit below:

>By 1978, the banks had extended $850 million in credit to diamond
>dealers, an amount equal to some 5 percent of the entire gross
>national product of Israel. The only collateral the banks had for
>these loans was uncut diamonds ... 
>
>De Beers estimated that the Israeli stockpile was more than 6 million
>carats in 1977, and growing at a rate of almost half a million carats
>a month. At that rate, it would be only a matter of months before the
>Israeli stockpile would exceed the cartel's in London. If Israel
>controlled such an enormous quantity of diamonds, the cartel could no
>longer fix the price of diamonds with impunity ... The cartel decided
>						   ^^^^^^^^^^^^^^^^^^
>that it had no alternative but to force liquidation of the Israeli
>^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>stockpile.
>^^^^^^^^^^
[contrast to Saudi Arabia in OPEC. --psb]

[this is brilliant/insidious! ... you mess with us, we generate a 
margin call!]
>If De Beers wanted to bring the diamond speculation under control, it
>would have to clamp down on the banks, which were financing diamond
>purchases with artificially low interest rates. De Beers announced
>that it was adopting a new strategy of imposing "surcharges" on
>diamonds. Since these "surcharges," which might be as much as 40
>percent of the value of the diamonds, were effectively a temporary
>price increase, they could pose a risk to banks extending credit to
>diamond dealers. For example, with a 40 percent surcharge, a diamond
>dealer would have to pay $1,400 rather than $1,000 for a small lot of
>diamonds; however, if the surcharge was withdrawn, the diamonds would
>be worth only a thousand dollars.
>

["we control the horizontal, the vertical and the collateral"]
> ... instead of lending money based on what Israeli dealers paid for
>diamonds, the banks began basing their loans on the official De Beers
>price for diamonds.
>

["and the supply" ...]
>To tighten the squeeze on Israel, De Beers abruptly cut off shipments
>of diamonds to forty of its clients who had been selling large
>portions of their consignments to Israeli dealers. As Israeli dealers
>found it increasingly difficult either to buy or finance diamonds,
>they were forced to sell ... went bankrupt as prices continued to
>plunge. The banks inherited the diamonds.
>

["and the demand" ...]
>They had been informed that three Israeli banks were holding $1.5
>billion worth of diamonds in their vaults -- an amount equal to
>nearly the annual production of all the diamond mines in the world
>...  The only alternative to dumping their diamonds on the market was
>reselling them to De Beers itself.
>