The Daily Bell Issue 458 • Sunday, November 01, 2009 |  |
Edward J. Epstein explains the Diamond Racket and how De Beers and others Managed its Trade
Dr. Edward J. Epstein
The editors of The Daily Bell are pleased to present an exclusive interview with investigative reporter Dr. Edward J. Epstein.
Introduction: Edward Jay Epstein studied government at Cornell and Harvard, and received a PhD from Harvard in 1973. During this time he published two books - his master's thesis, "Inquest: The Warren Commission and the Establishment of Truth," and his PhD thesis "News From Nowhere: The Selection of Reality On Television." After teaching at MIT and UCLA for a year, he became a full time author and joined the staff of the New Yorker magazine while still at Harvard. He wrote press criticism for the magazine, which also became a book, "Between Fact and Fiction." He was sent to New Orleans to investigate DA Jim Garrison. This also became a book "Counterplot." He then did a biography of Lee Harvey Oswald, "Legend." His most famous book is probably "The Rise and Fall of Diamonds."
Daily Bell: Thanks for sitting down with us. You are a fine writer and researcher. Growing up did you always want to be an investigative reporter?
Epstein: No. I wanted to be a professor. But by the time I had gotten my PhD in government, I had published two books - my master's thesis, "Inquest: The Warren Commission and the Establishment of Truth," and my PhD thesis "News From Nowhere: The Selection of Reality On Television." So after teaching at MIT and UCLA for a year, I became a full time author.
Daily Bell: Give us a little more background on your life and choice of topics. Bring us up to the point where you began researching the diamond trade.
Epstein: I joined the staff of the New Yorker magazine while still at Harvard, and wrote press criticism for it, which became "Between Fact and Fiction." I also was sent to New Orleans to investigate its DA, Jim Garrison. This also became a book "Counterplot." I then did a biography of Lee Harvey Oswald, "Legend."
Daily Bell: You are noted for your book exposing the diamond conspiracy. How did you decide to write a book on the diamond intervention and where can it be found?
Epstein: The German magazine Geo, starting an American edition, proposed I write about the diamond mines of Africa. While staying in the guest houses of De Beers, and chatting with their engineers and executives, I realized that the diamond business was really not so much an extractive industry but an operation based on the suppression of production. This limitation was crucial to maintain the illusion that diamonds were forever rare and valuable. So I decided to write about the creation of the illusion. The book, "The Rise & Fall of Diamonds" (Or in the UK, "The Diamond Invention") can be found at bookstores.
Daily Bell: Free market types maintain that a monopoly can only be maintained with government intervention. Is this true in your opinion?
Epstein: De Beers is not a monopoly. It is an arrangement among producers to limit the number of diamonds that reach the market. To achieve this goal, it had been until this year a buyer of last resort, and contracts with other producers to buy up their production, which it then warehouses in its vault.
Daily Bell: Explain the thesis of your book on the diamond intervention and how the main players manage to maintain their cartel.
Epstein: Diamonds are not rare. They are, after TV sets, the most common possession in America. Yet, to sustain the illusion that they are rare, the diamond cartel has to convince the public not to see their diamonds, ever, because they will gain in value. This requires controlling the number of rough diamonds that are cut and sold by allotting the major cutters a quota.
Daily Bell: Why is understanding the diamond cartel so important from a free market standpoint?
Epstein: It illustrates the extent to which "value" is a function of the manipulation of public opinion.
Daily Bell: What is the difference between gold, silver and diamonds from your perspective?
Epstein: Unlike diamonds, Gold and silver are fungible, which means that a given quantity can be exchanged for another given quantity with loss. If an once of gold is worth $1,000, it can be traded for another ounce, borrowed against, or used to back a currency. An ounce of diamonds cannot be traded for another ounce, since the value of each ounce can vary enormously depending on its individual quantities and is in the eye of the beholder. In this respect, diamonds are more like art or antiques.
Daily Bell: What is your impressions of De Beers Diamond Trading Corporation at this point in time, some years after the book?
Epstein: The new De Beers circa 2009 is not the old De Beers. It can no longer afford to be the buyer of last resort so has this year effectively turned over the cartel to the Russians. Instead, it is branding itself and opening retail stores. Whether or not it succeeds, it is no longer interesting to me.
Daily Bell: What is your impression of the Anglo-American Corporation at 44 Main Street in South Africa. Have they been affected by the increased socialism of the government?
Epstein: I have always been impressed by the skill and acumen by the people at Anglo and De Beers. They have always been good at dealing with governments, even hostile ones, and as they have enormous skills at organizing and running mining industries, I assume they will be of great value to the present-day leaders of Africa, whether they are capitalists, socialists or dictators.
Daily Bell: Anglo-American executives who explained De Beers' diamond mining strategy included Peter J. R. Leyden, the manager of Diamond Services, L. G. Murray, the chief geologist for De Beers, Barry R. Mortimer, the chief public relations consultant for De Beers, and Ivor Sanders, the public affairs officer at Anglo-American. Can you give us more details on how De Beers generally - or controlled -- controls the diamond trade through indirect levers?
Epstein: First, De Beers has made deals with other diamond producers - Angola, Russia, Sierra Leone, to buy their production. So it limits the quantity of diamonds that reach the market. Next, it makes deals with the major cutters, furnishing them with "boxes" of diamonds at a take-it-or-leave-it price on condition the cutter follow its rules in pricing these diamonds to retailers. Third, it maintains demand through ad campaigns.
Daily Bell: Can you give us a more detailed explanation on how Cecil Rhodes fits into the diamond picture and De Beers?
Epstein: In Kimberley, South Africa, huge mines, called pipes, were found in the late 1800s that could be mined with a steam-shovel. So diamonds were no longer rare, and the price fell to less than $5 a carat. Rhodes stepped in and organized the dozens of mine-owners that shared land in these pipes into a single entity - De Beers. He then limited production to the numbers of engagements per year in America (the principal market). So he limited production.
Daily Bell: How does the Jewish diamond establishment interact with De Beers and Anglo American?
Epstein: Otto Oppenheimer controlled the Diamond Syndicate in London, which distributed diamonds, and was financed by Jewish bankers. After WW I, he managed to get control of the diamonds in the former German colony of Namibia. De Beers needed these diamonds to complete its control of production. So Oppenheimer merged the diamond syndicate with De Beers, giving him effective control.
Daily Bell: Please expand on Oppenheimer's plan to jettison several tons of diamonds into the North Sea.
Epstein: In the depression, the demand for diamonds disappeared in America. Meanwhile, even though De Beers shut its mines, the stockpile kept growing because of outside purchases. Concerned that if it had to sell this stockpile it would forever destroy the illusion of diamonds, Oppenheimer considered dumping it in ocean, but didn't.
Daily Bell: Can you detail for us the diamond smuggling that went on during World War II, how Hitler managed to obtain industrial diamonds and whether diamond smuggling continues today. Did the diamond syndicate, despite its Jewish population deal directly with Germany during World War II, and did the Anglo-American governments countenance it?
Epstein: Germany needed industrial diamonds to cut tungsten steel for its tanks. So it bought the diamonds on the black market. Anglo was not involved in these activities, but discouraged government investigations that might cast light on shadier parts of its world-wide operations.
Daily Bell: What is Israel's role in all this?
Epstein: Israel, created in 1948, became a major cutting center-second only to Antwerp-for De Beer's diamonds
Daily Bell: How have synthetic diamonds had an impact on the diamond industry?
Epstein: Synthetic diamonds replaced industrial diamonds. They have had little effect on gem diamonds?
Daily Bell: Who was Goldfinger?
Epstein: He is a fictional character in an Ian Fleming novel and James Bond movie. Fleming may-or may not-have modeled the legal part of his business on that of Charlie Engelhard, who legally exported gold from Hong Kong in the form of manufactured goods. Other than that, the character had nothing to do with that of Engelhard (who was a good friend of Fleming.)
Daily Bell: Are diamonds of any kind a good investment?
Epstein: No, because they are not fungible.
Daily Bell: What have you been doing since the publication of the diamond book in the 1980s? What kind of reporting and writing have you been pursuing?
Epstein: The 13 books I have written include subject matter as varied as the CIA, KGB, and Armand Hammer. My last book, "The Big Picture," is about money and power in Hollywood.
Daily Bell: What are your concerns today regarding diamonds and the economy in general?
Epstein: If the recession continues through 2011, I doubt that it will be possible to sustain the illusion that diamonds are valuable.
Daily Bell: Any closing comments on gold, silver or diamonds?
Epstein: Gold and silver derive their value from supply and demand. No one stores them for sentimental value. The largest supply of diamonds is held by the public in vaults and jewelry boxes for sentimental value. If that sentiment changes, and people no longer believe diamonds are forever, the illusion that sustains the diamond market will shatter-and prices will plunge.
Daily Bell: Thanks for your time and for a fascinating interview.
Epstein: It was my pleasure.
After Thoughts with Scott Smith
It is a terrific pleasure to listen to - and read - the wisdom and insights of such an erudite individual. Dr. Epstein has truly pursued a career focused on the life of the mind and he is to be fully credited for doing so in an epoch where such creative acts are unfortunately but inevitably diminished.
If we had one tiny criticism to make of Dr. Epstein's magnum opus - his book examining the diamond cartel - it would have to be his statement that the De Beers' organized management of the diamond industry did not amount to a monopoly.
It is not our intention herein to get into a large discussion of what constitutes a monopoly. However, if a given product or commodity has one "real" value but a provider of said commodity through "management" of the market inflates the commodity's value over a long period of time, then that entity is exhibiting monopoly-like powers and the product's price history itself could be said to be the result of a monopoly.
Dr. Epstein, of course, points out that De Beers is not a monopoly but an arrangement among producers to limit the number of diamonds that reach the market. "To achieve this goal," he explains to us "it had been ... a buyer of last resort, and contracts with other producers to buy up their production, which it then warehouses in its vault."
We do not know nearly as much as Dr. Epstein about any of these affairs. However, as free-market enthusiasts and amateur Austrian economists, we have come to believe in the classic definition of a monopoly, as alluded to above: It is government driven.
This stands to reason because in the free-market if a price is too high, then other producers will come in and drive the price down. Why wouldn't they? A regulated (government mandated) market is easy to spot because prices never go down much and indeed may go up year to year (look at the auto industry.)
Contrast so-called mature industries with relatively unregulated ones such as the computer industry and you will see a big difference. Computers, as yet relatively unregulated, have seen prices drop regularly over the years. Fifty years ago, computers cost millions. Today, they cost hundreds, and some day they may literally be given away (assuming they are not subject to some sort of regulatory onslaught).
Prices always seem to drop in unregulated industries. This goes for the mining industry itself, which is always developing better extraction equipment. Absent regulation and (government/private) manipulation, prices eternally move gently downward in almost any given industrial situation.
For this reason, we are just not sure - or not entirely sure - that it was the private market itself, which sustained the De Beers manipulation. In fact, the only way such a manipulation could take root and continue over decades is, in our opinion, if it was aided and abetted by governments.
In fact, we noted Cecil Rhodes involvement with the diamond industry with considerable interest because Rhodes was a big supporter of the British Crown - and thus a kind of mingling of private and public/national interests. This sort of approach is also known as mercantilism.
In our opinion, the diamond market has probably been subject to a sustained onslaught of aggressive mercantilism - in which a private cartel joined forces with governments to sustain the price of a commodity. (Peruse the Internet and you will find plenty of intimations of this as regards to diamonds). This can be done by having the governments ensure that only certain individuals can gain mining licenses or by having governments hamper the free-enterprise system in other ways.
We know Dr. Epstein did not seem to come to this conclusion in his book or even in his interview. He seems to blame the free-enterprise system entirely for the price inflation of diamonds. It is to our mind, a single question mark in an otherwise fascinating work. Indeed, the quibble is likely minor in relation to the gamut of scholarly and popular reports that Dr. Epstein has authored.
Nonetheless the Internet is a teaching instrument. For anyone who accepts the tenets of marginal utility or the invisible hand, it is ultimately impossible to believe that private markets can be manipulated over the long term. The only force capable of sustaining artificial prices for any length of time is the government - through force.
The endless canards of 19th and 20th century scholarship as regards the sins of the private market may finally be ending as a result of Internet education about markets and economics. We hope so. Market prices, absent government interference, are almost inevitably efficient. (They may not be "right" - but that's a topic for another day.) Prices only become inefficient over longer periods of time when they are interfered with by governments. There is no other logical conclusion. One must jettison everything one has painfully amassed about economics to conclude otherwise, in our humble opinion.
Wow, a great job was done by Edward Jay Epstein. Press criticism could be a bit dangerous work, I think, especially if it concerns such giants as De Beers. But do you really think natural diamonds are not so rare?
RispondiEliminaYou said: "Synthetic diamonds replaced industrial diamonds. They have had little effect on gem diamonds." I don't think so, as there are enough online retailers and shops offering jewelry with lab-grown diamonds. And there are about a dozen of corporations and companies which specialize on growing gemstones alongside industrial diamonds. I must admit, cultured gemstones look just the same as natural stones.