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Cecil Rhodes, Ernest Oppenheimer and the Birth of the Diamond Cartel

Before the discovery of diamond mines in South Africa the gemstones were found only in the beds of some Indian rivers and parts of the Brazilian jungle.

Diamonds in World War II

When the Second World War broke out control of sources of vital materials, including industrial diamonds, was of the utmost importance. Even though the world's biggest sources of diamonds, South Africa and South-West Africa (Namibia), were part of the Commonwealth and Empire, industrial diamonds were in short supply in the British aircraft industry and also in the Canadian mining industry during the early years of the war. Germany had been stockpiling diamonds in preparation for war since 1936. After the commencement of hostilities Germany continued to import diamonds from producers over which Britain had no control, namely Brazil and Venezuela. Neutral countries such as Belgium, Holland, Switzerland and the United States that imported diamonds from the British Empire resold some of them to Germany and large stocks in Antwerp, one of the of world's main diamond cutting centres, fell into German hands after the conquest of the Low Countries in May 1940.

Relations between the British government and the diamond suppliers were not always easy. From intercepted telegrams it was discovered that De Beers had deferred diamond sales to spread the company's turnover into 1941 in order to avoid excess profits tax, leading an official in the Ministry of Supply to ask what state the country would be in if the manufacturers of Spitfires and Hurricanes acted in a similar manner. In fairness to De Beers there were enough diamonds in Britain at that time and Sir Ernest Oppenheimer's letters to his son Harry, who was on active service in the 4th South African Armoured Car Regiment in the Eighth Army in North Africa, showed that he felt De Beers had received no credit for their policy of selling diamonds at pre-war prices (Gregory, 1961, p. 324). Nevertheless tax avoidance during war time is an obviously unpatriotic act.

Diamonds were also a source of friction between Britain and the United States. The British government had placed restrictions on diamond exports to neutral countries until assurances were given that they would not be resold to Germany. The Swiss proved cooperative but the Americans were much less so, and the United States government informed Britain that it would take no steps to stop re-export of diamonds by surface mail or airmail. (Newbury, 1989, p. 336). Even though it refused to crack down on diamond exports to Germany the American government was worried about the possibility of British stocks falling into German hands if Britain were conquered or surrendered, and therefore it tried to persuade Britain to sell a large part of her own strategic stockpile to the US! Sir Ernest Oppenheimer actually agreed to this request on a visit to the United States and also agreed to sell the Americans £2.5 million worth of industrial diamonds but he had exceeded his authority and the British government vetoed both proposals. (Newbury, 1989, p. 338)

Negotiations about the bulk sale of diamonds to the United States dragged on until well into 1941. Following the Japanese attack on Pearl Harbor and Germany's declaration of war on the US four days later, the British and American governments worked more closely together to control diamond supplies. Even though Oppenheimer had previously been in favour of transferring British stocks to the US he opposed American plans for stockpiling because the existence of such a source outside the control of De Beers would threaten its monopoly after the war and also reduce its chance of directly entering the US market (Newbury, 1989, p. 346). However, by the end of 1942 a compromise agreement was reached whereby a stockpile, that both the United States and Britain could draw on if necessary, was established in Canada. This scheme worked reasonably well but was not totally free of problems. The British suspected that the Americans were overdrawing on the Canadian stockpile in order to build up their own stocks and circumvent the single channel monopoly once the war was over (Newbury, 1989, p. 349-350). Oppenheimer too was alarmed by the extent of the build-up of American stocks of diamonds and thought that the quantity could not possibly be used for military purposes (Gregory, 1961, p. 325).

Although the Germans did not control any diamond producing areas they were still obtaining supplies through various channels. A diamond-cutting industry had been developed by Jewish refugees in Palestine which the Belgian government in exile regarded as a threat to the eventual rehabilitation of Antwerp as the principal centre for diamond cutting. A more pressing concern to Britain was the fact that the existence of such an industry in Palestine encouraged a clandestine trade with Syria and Turkey in diamonds that were re-sold to Germany and consequently controls on the supply of diamonds to Palestine were imposed by the British authorities (Newbury, 1989, p. 345).

Sir Ernest Oppenheimer was worried about the security of diamond stocks in the Congo and warned the dangers of them being seized in a German commando raid by air (presumably from territory controlled by the Vichy regime in France) but the British government suspected that Oppenheimer's motive was to centralise stocks in South Africa and ultimately gain control of the distribution end of the business, which had traditionally been controlled from London (Newbury, 1989, p. 342). In fact the Germans did not need to mount a commando raid. Although the mines in the Congo were nominally under the control of the Belgian government in exile and were supervised by De Beers, investigations by the American Office of Strategic Services (OSS) showed that Congolese diamonds were reaching Germany via Tangier and Cairo. An OSS agent code-named Teton believed that the Belgian police chief in Leopoldville was responsible for the smuggling operation, but Teton was expelled by the governor general of the Congo and subsequently British Intelligence took over the task of interdicting the supply. However some sections of the OSS suspected that the British avoided a full investigation of whether or not De Beers could have done more to prevent the leakage of diamonds because of fears that officials in the Ministry of Economic Warfare, which had strong links with De Beers, might be implicated (Epstein, chapter 9). 

In January 1945 the US assistant attorney general filed a suit against De Beers and other diamond companies for "conspiring to restrain and monopolise commerce." One of the specific complaints was that the companies had prevented stockpiling in the United States. Given that the Americans had been stockpiling diamonds on a considerable scale since 1943 that complaint was manifestly unfair (Newbury, 1989, p351). Other allegations remain controversial to this day. It was claimed that De Beers had prevented competition before the war by buying out potential diamond producing operations in other countries and then preventing their development. One such case involved a mine in Arkansas were diamonds had been discovered in 1906. Since then several attempts have been made to develop a commercial mine but all have failed. The Crater of Diamonds is now a state park. At her husband's inauguration as president in 1993, Hillary Clinton wore a ring containing Arkansas diamonds. In 1997 the Canadian company Ashton Mining examined a 10,000 ton sample of material from the Crater of diamonds and came to the conclusion that mining in the area would not be commercially viable. No doubt their report came as a disappointment to conspiracy theorists who can always point out that it does not prove that De Beers had not wanted Arkansas to become a significant producer.

The South African government was worried about the anti-trust case and tried to persuade the British government to intervene. However the British were much more sanguine and dismissed the affair as just another episode of the periodic "cartel bashing" to which the Americans were prone, inspired in this particular case by an over-zealous assistant attorney general (Newbury, 1989, p.351-352). Eventually the case was dropped because the court was not satisfied that it could be shown that any diamond company had exercised a monopoly over sales in the United States.

The International Diamond Security Organisation

Germany's success in obtaining diamonds during the war showed just how difficult it was to prevent diamond smuggling. That was true in peacetime too. There was a huge unsatisfied demand for diamonds as a hedge against world-wide inflation and the Cold War led to industrial diamonds were being stockpiled by the United States, the Soviet Union and China. Thus, by the early 1950s diamonds to the value of ten million pounds were being smuggled out of Africa every year. That would be equivalent to over £160 million (or over US$230 million) in terms of monetary values in the year 2000. The Million Carat Network, the name given to the illegal trade, is another indication of its size of the traffic and as national police services seemed incapable of ending it, in November 1953 Ernest Oppenheimer turned to Sir Percy Sillitoe, the former head of MI5. During the war MI5's record in capturing and turning German spies had been outstanding. In effect, through its double-agent system it actively ran and controlled the German espionage system in Britain (Masterman, p. xii).

Some accounts of the breaking of the diamond smuggling network in the 1950s give Sir Percy Sillitoe the credit for MI5's success. The double-cross system had actually been run by John Masterman, an Oxford don who had been Harry Openheimer's tutor in politics at Oxford. According to the Dictionary of National Biography, Sillitoe was in overall charge of the police forces in Kent during the war. Peter Wright, a former British agent who created great controversy by publishing his memoirs, Spycatcher, in 1987, claimed that Sillitoe was made boss of MI5 by the prime minister Clement Atlee in 1946 as a snub to the intelligence services which Atlee blamed for the Zinoviev letter in 1929.  That letter, purporting to be from the Russians, called on the British Communist Party to prepare for revolution and was blamed by the Labour Party for the defeat of Britain's first Labour government in the general election of 1924.

In 1953, not long after Sillitoe had retired, he was approached by Sir Ernest Oppenheimer for assistance in combatting illicit traffic in diamonds. Sir Percy agreed and in March 1954 undertook a 6-week tour of diamond mines all over Africa at the end of which he set up the International Diamond Security Organization which had the twin aims of increasing security at the mines and discovering the major channels of smuggling to Europe, the Middle East, and the Iron Curtain. Because London was the main international centre for diamond sales the trade was a huge dollar earner for Britain and hence IDSO had no difficulty in getting support from the highest in the land. By means of undercover buying in Liberia and Rhodesia the IDSO was able to penetrate the smuggling rings, but suffered some setbacks along the way. A former airline steward who infiltrated the smuggling network died when his plane crashed on Kilimanjaro before he could pass on to the IDSO important information that he claimed to have discovered.

Roy Davies, Exeter, UK