Part One: Sir Ernest Oppenheimer, De Beers and the evolution of central selling, 1920-1950
INTRODUCTION
It is not often that the historian is given the opportunity to expand and revise past work. I would like to thank the Economic History Society of Southern Africa for the opportunity to present a new version of my published account of the rise and performance of De Beers Consolidated Mines Ltd, prior to 1947, against the longer perspective of the company’s structure dowri to the 1990s. The longer perspective alters the interpretation, and it allows one to emphasize some of the more permanent features of diamond marketing and the use of company profits.
The questions requiring interpretation in the long term have not changed either, though the answers, I think, have. Firstly, any history of De Beers in relation to the diamond trade demands a reasoned explanation for the longevity of so-called “single-channel selling”, more usually obscured in that convenient but vague phrase – the “Central SeIling Organisation” – which is repeated in company reports and the financial press as a kind of mantra for the continuation of a profitable brokerage in diamond wholesaling.
Secondly, there is still a tendency to summarise company policies in terms of personalities – Rhodes, or the Oppenheimers – as though biography can be used as a substitute for business history. That tendency has become more difficult, of course, as the company and its subsidiaries have moved through the phases of Alfred D. Chandler’s managerial revolution in which the professionals are supposed to replace the dominant alpha male chairman and create a faceless and efficient bureaucracy.
But the role of the personal entrepreneur on a board or boards as a determinant of policy is still an open question. Finally, there is the question Alfred Chandler avoided in his seminal study of monopoly industrial growth – namely the company’s relationship with the state which in the case of South Africa is a fascinating history of hostility and accommodation; and this ambivalence has important consequences for recent company policies. (1)
Answers to these three questions centre, I believe, on company structure and profitability; and that core theme is best treated as a process of historical evolution to meet changing circumstances in Africa and in the international diamond trade. The stages of that evolution have been divided into two main phases in two papers, the first of which will treat the restructuring of the 1920s and 1930s which enabled the company and the wholesale brokerage to survive the Second World War intact and profit from the extraordinary expansion of diamond production and marketing after 1947.
The second article, to be published in this journal at a later date will deal with the economic and political challenges faced by the company to the present day and will try to come to some conclusions concerning the questions raised above. (2)
SINGLE.CHANNEL SELLING: Origins and transformation
It is important for the longer perspective to realise that the so-called monopoly of diamond production and marketing was really a short-lived affair, no longer than a decade following the amalgamation of productive mines under Rhodes’s consolidated company in 1889 and the effective combination of the half dozen or so London merchant wholesalers who purchased a fixed share of an annual production of some two million metric carats and sold to brokers and manufacturers in series and at a common scale of prices.
The monopoly consisted, therefore, in De Beers unique ownership of the world’s supply, on the one hand, and the discipline of the merchant cartel which prevented separate sales outside the pattern of regular sights in London which emerged in the 1890s. (3) And it helps to explain the company’s 25 per cent return on capital at that early period and the healthy return to the syndicate of five per cent on annual re-sales worth £2 to £3 millions, 1890-1903.
(1). AD. Chandler, Strategy and Structure: Chapters in the history of the American industrial enterprizes, Cambridge (Mass), 1962. For a more general consideration of the historiography of diamond mining and marketing, Colin Newbury, The diamond ring? Business, politics and precious stones in South Africa, 1867-1947, Oxford, 1989, pp 1-6, 359-78.
(2). Forthcoming special issue on business imperialism in South Africa.
(3). Colin Newbury, “The origins and function of the London Diamond Syndicate, 1889-1914, Business History, 29(1), 1987, pp 7-26
There was, however, considerable tension between producer and diamond syndicate over the markup achieved by the wholesalers which was only relieved by profit-sharing from 1901 (Rhodes’s second great contribution to the early structure of the industry) and by devising a pricing and replacement formula in an annual contract worked out by merchant representatives and the De Beers diamond committee at Kimberley.
The temporary monopoly in production was broken forever by competition from new mines after 1902 at Premier in the Transvaal and in German South West Africa. To meet this contingency two techniques were applied and developed. One was to use De Beers financial reserves and merchant capital to take an interest in mines in South Africa which brought Peiser, Koffiefontein, Kamfersdam, New Jagersfontein, and to some extent, Premier, under the control of the major producing company by the 1920s. The second innovation inspired by the South African Mines Department and the Inlarid Revenue in 1914 was to outline an international quota agreement for sales to the syndicate from the production of De Beers, Premier, New Jagersfontein and the South West mines controlled through the German Regie.
Unapplied on the eve of the war, the contract nevertheless was retained after 1918 as the model for quotas and central selling through the syndicate. By 1918, moreover, the centrality of the merchant cartel had been confirmed by British wartime controls and the participants had been reduced to five companies – Breitmeyer, Barnato Bros, Mosenthal, Dunkelsbuhler and Central Mining and Investments (ex Wernher, Beit) – which put up £5 million capital to purchase just over three million carats of diamonds and re-sell them, after classification, to the cutting industries of the Continent and America.
South African dominance, moreover, had been confirmed by the capture of German mines and their purchase by the Hull-Graaff syndicate 23 November 1919 and by the transfer of German Colonial Company rights and other rights to Anglo American Corporation on 24 November, separately from other German shares and estates control fed by the Custodian of Enemy Properties. (4)
(4). For the initial offer to purchase of diamond mining assets by the syndicate fanned by the Han H.c. Hull and Sir David Graaff in 1919 before ratification of the Peace Treaty and the Mandate by the Cape Parliament, see Colin Newbury, “Spoils of war: Sub-imperial collaboration in South West Africa and New Guinea”, 1914-20, The Journal of imperial and Commonwealth History, 16(3), 1983, pp 86-105; and the valuable memorandum by J.H. Munnick for the Minister of Mines, 16 March 1927 in the Central Archives Depot, MNW 390 MM 1687/27. Much has been made by Oppenheimer’s biographers of Sir Ernest’s role in this takeover and in the guarantees given to Consolidated Diamond Mines concerning sale of goods from the independent mines not take into the company and which were central to the syndicate contract crisis of 1925 and Anglo’s counter-proposal to purchase all South West production. See Newbury (1989), op cit, pp 252-54, cf Edward Jessup, Ernest Oppenheimer a study in power, London, 1979, p 136. There no documentary evidence of any such official guarantees from 1919 or 1920.