On July 30, 1914, 100 years ago, in smoked-filled boardrooms and government offices, two entirely different sets of negotiations were taking place: one was to prevent the eruption of World War I, and the other was to prevent the threatening collapse of the diamond world. The first one is well-documented; the latter is more complicated, and I have often wondered whether the governments of the diamond producers at that time ever realized the enormity of the impact of their actions from these discussions.

Let’s look at the parallel events that took place on that fateful day, Thursday, July 30, 1914, and during that following weekend. As historians recount it, throughout the morning and afternoon, the world’s emperors, ambassadors, prime ministers and politicians were exchanging proposals, guarantees, reassurances, and threats. Russia’s military “mobilization” order came later that night. That changed the global agendas immediately, as efforts shifted from attempting to prevent the Austria-Serbia conflict from turning into all-out war to preparing for the one that actually began on Sunday.

By 1918, the four combatant European empires were all destroyed; 15-20 million people had been killed; the issues which turned a Balkan-peninsula conflict into a global war had become irrelevant; and the eruption of communism and fascism were more dangerous for the surviving Allies than the challenges they had planned against before the war.

This week, historians at a Washington think-thank (“Progressive Economy”) mused that now, a century later, “the event and its aftermath still pose disturbing questions of politics and human nature: the reasons diplomacy and deterrents can fail in crisis; the relationships between the abstract policy and tactical decisions of governments and military commanders, the moods of publics, and the experience of common soldiers; most of all, the unforeseeable consequences of conflict.”

The Diamond Industry’s Formative Years
All these questions of politics and human nature were also prevalent in the formative years of diamond mining and marketing. In the early days of the 20^th century, South Africa enjoyed what was called a “natural monopoly” over diamond production. During that time, there were competing mines and a London “syndicate,” made up of independent distributors, which committed itself to purchase quotas from some of the individual mines.

In the early 1900’s, some 98 percent of all diamonds came from one geographical location, from one country.  That changed in 1908, when in the barren desert sands of South West Africa (now Namibia), alluvial diamonds were discovered. In 1894, the German Chancellor Bismarck had declared the vast territory a German protectorate, subjugating the Hottentots and other tribes.

In those days, De Beers showed little interest in alluvial mining, believing that the long-term future lay in deep-level mining. The miner simply underestimated the threat posed by alluvial productions. The American recession in 1907 had slowed down world trade in diamonds; the mines of De Beers (which were only one of the producers back then) had actually been closed, production curtailed, inventories were high, and staff laid off. These were the pre-war days. Writes one historian: “De Beers and the Diamond Syndicate were not unduly perturbed by the alluvial deposits of South West Africa. The directors of De Beers, firmly wedded as they were to deep-level mining, were obdurate and, like most old men, conservative in their approach. De Beers had become ‘a very sleepy organization’.” (Jessup)

Failure by De Beers to seriously aim at getting control of these deposits in South West Africa proved to have been a historic mistake. Soon, 15 small companies were mining over a coastal strip of some 100 kilometers after receiving concessions from the Kolonial Gesellschaft, which, in turn, funded the Deutsche Diamanten Gesellschaft, which ultimately held all the mining rights by special agreement with the German Colonial Office. [There were only two “foreign-owned” concessions.]

The Germans quickly imitated the selling system of the London syndicate. In 1900, a control board, called Regie, was established that was responsible for the selling of all diamond production. The Régie avoided London and sold the bulk of its production to and through an Antwerp syndicate with which it had contractual arrangements. [When some goods were tendered, Antwerp outbid the London syndicate in almost any event – at least up to 1913.] The Antwerp dealers succeeded in getting the prices almost doubled in these pre-war days.

‘Hostile Relations’ among Competing Mines
Most of us have grown up in a diamond-cartel environment that boasts a mostly “gentlemanly” manner of interaction among cartel participants and even among competing so-called “outside” producers. The recognition and realization of the shared interests, or call it economic interdependency, is never lost on the producers. But that was not the situation in pre-1914 days in the then-still limited producer community.

Just to place matters in perspective, in 1913, global rough diamond production totaled 6.7 million carats, worth some £12 million in 1913 prices. Over 44 percent of this was considered purely industrial diamonds. In 1914, five months into the war, production was reduced to 5.4 million carats. [Using a purchasing power calculator, which might tell me what £12 million in 1913 prices could buy me today, it became the equivalent of £941.5 million or $1.59 billion – thus, about 10 percent of current global production. In carat values, again using the purchasing power measurement, production was then $237 per carat in today’s values.]

Back to the past. In 1913, within South Africa, De Beers operated four mines producing all together some 2.2 million carats. The competing Premier mine, in the same year, also produced 2.2 million carats – though it would soon go well below 1 million because of depletion of its resource. Premier was not willing to artificially reduce production. De Beers didn’t like that at all. The following gives some sense of the relations among these miners:

“The feud between De Beers and Premier continued unabated, each side peppering the other with missiles of rage and criticism. The chairman of Premier referred to the ‘attacks consistently and continually made on us by these high priests of the diamond religion: the Taschi Lama of Jagersfontein and the Dalai Lama of Kimberley... All I can say is that neither the remarks of the chairman of De Beers nor the remarks of the Chairman of the Jagersfontein company will reduce the production of this company by a one single carat…’” (Jessup)

To imagine that Premier would voluntarily join a quota system seemed, at that time, almost like a mission impossible.

The ‘London Conference’
In early 1914, the South African government was “running scared.” Some mines (Premier) were facing declining output (and government received fewer taxes). It had persuaded mines like Premier, Jagersfontein, and De Beers to also try to tender for South West African diamonds – but Antwerp simply always paid more. In South Africa, the government could force the mines to reduce output in adverse periods – however, South West African alluvial mines saw no real reasons for restraint. The then-South African Minister of Finance, Smuts, felt that an attempt should be made to bring the German government to the table and try to create a producer cartel. That was the very first attempt to organize producers in a multi-country international context.

The German Foreign Office approved of the initiative but insisted that the negotiations be conducted in London, where a “quota” system (in which the London brokers each committed themselves to buy a fixed part of the output) could be debated. De Beers was all in favor as, recalls another historian, “it had come round to the view that the market could be influenced by signs of co-operation to reduce over-production … at the mere announcement of a conference among producers.”

The date was set for July 14, 1914. The four major South African producers (De Beers, Premier, Jagersfontein and Koffiefontein), four members of the London syndicate, met with the German Régie. [Ernest Oppenheimer attended as a representative of the Dunkelsbuhler broker, a member of the London syndicate. The Oppenheimers were then not yet involved with De Beers.] This was the first time terms for international quotas were hammered out. The mining companies made all efforts to keep the terms of the deal secret – the British government was not informed. The precedent was created that the contract was viewed as a specific commercial contract.

It ended in an agreement on July 30, 1914

Terms of Tripartite Agreement
Ernest Oppenheimer’s biographer referred to this as “the Tripartite Agreement reached between South African producers, the German Diamond Régie, and the Diamond Syndicate.” (Gregory) The members agreed that they would put an upper ceiling of diamond supplies to the world of £12.5 million (which, in fact, was the total sold during 2013.) Quotas were fixed at 48 percent for De Beers, 19 percent for Premier, 11 percent for the new Jagersfontein, and 21 percent for the Régie, which would continue to handle all South West Africa output.

The importance of the Tripartite Agreement is in the adoption of the procedures, which, over the years, evolved in contracts between the London syndicate and De Beers: standard assortments and basis prices from a fixed date, a fixed percentage of the profits for the selling agency from the re-sales (i.e. the ultimate selling values), without a profit sharing with the producers. There was also a mention of a “board of control” in the manner of the Régie with two members of each producer and even a provision for dispute settlements by “commissioners” appointed by German and South Africa Union governments.

DIB tried to find the details on the commissions. One source states that “the diamond syndicate would be receiving a commission of 4% of the total net sales proceeds plus 5% of the profits, if any.” The stocks of the various syndicate members held at the beginning of the arrangements could be put into the pool and would be sold over a three-year period. Syndicate members were allowed to buy some “outside” goods, but at a ceiling of £500,000 per year.

The Tripartite Agreement was never implemented. Just a few days after the signing, war broke out. Today, we might wonder whether those attending the end-of-July-1914 meetings were unaware that war could break out at any minute. Probably not. Historians agree, however, that the fact that the Tripartite Agreement was never in force doesn’t diminish its considerable historical significance.

“Its terms were more than academic. The scale of quotas adopted and the general acceptance of the syndicate’s methods of doing business as a model for the producers’ cartel in the diamond world. It was, in fact, an enormous step forward in international regulation by contract in a trade which had been over-producing rapidly. The principal lesson of the period from 1903 had been recognized, when the syndicate and De Beers found they could influence the scale of resale [i.e. supply to cutting centers] for gemstones, but could not control the larger amounts of cheaper stones finding their way into cutting and industrial production shortly before the war.” (Jessup)

What’s also interesting about this Tripartite Agreement is that the producers decided to give sparse details to their own shareholders. There were certain arrangements on which, even then, one wouldn’t talk about.

Pre-World War I Diamond Industry
When the London Conference took place, Amsterdam and Antwerp employed some 22,000 diamond workers. Germany had 800, Switzerland some 400, and smaller numbers in London and Paris. Even New York, which was the global capital of the retail markets, had no more than 300 cutters. World War I proved to be disastrous for all levels of the diamond pipeline. The closure of the Premier mine alone led to the dismissal of some 15,000 workers. Amsterdam and Antwerp merchants were unable to avoid a collapse of prices, and banks suspended all credits to cutters.

In German South West Africa, diamonds were not handed over to the Régie. When South Africa, which was part of the Allied Forces, took over the territory, diamonds continued to be stocked – as they could not be sold to the markets because they came from enemy origin. Stringent export controls were imposed – and, what we would call today “conflict diamonds” had come into the world.

100 Years Later
Today, 100 years ago, our world changed forever. An extraordinary chapter of economic progress had come to an end – it vanished. Most of Europe and the world became a “heap of swords” (to quote Barbara Tuchman). What we got thereafter we don’t have to dwell on in this editorial. In 1919, when the war was over, Ernest Oppenheimer used the Tripartite Agreement as the basic blueprint to reshape and rebuild the diamond industry – and that’s the legacy left to our diamond world from the then-visionary conference of 100 years ago.