Most people are probably aware that diamonds aren’t particularly rare and that their price is mostly a function of cartel control over the supply (De Beers) and good advertising.  While this is true, the story behind it is fascinating (and well told by Edward Jay Epstein, recently republished by the Atlantic, 30 years after its original publication).  Even after consolidating nearly every aspect of the diamond trade, from mining to processing, to polishing, to sales, De Beers had a major problem: supply was far outpacing demand.

In Europe, where diamond prices had collapsed during the Depression, there seemed little possibility of restoring public confidence in diamonds. In Germany, Austria, Italy, and Spain, the notion of giving a diamond ring to commemorate an engagement had never taken hold. In England and France, diamonds were still presumed to be jewels for aristocrats rather than the masses. Furthermore, Europe was on the verge of war, and there seemed little possibility of expanding diamond sales. This left the United States as the only real market for De Beers’s diamonds. In fact, in 1938 some three quarters of all the cartel’s diamonds were sold for engagement rings in the United States. Most of these stones, however, were smaller and of poorer quality than those bought in Europe, and had an average price of $80 apiece. Oppenheimer and the bankers believed that an advertising campaign could persuade Americans to buy more expensive diamonds.

How do you pump up demand for neatly aligned carbon atoms?  First, you understand who you’re selling to, why they’d be interested in buying, and then you sell a story:

N. W. Ayer [De Beer's ad agency] suggested that through a well-orchestrated advertising and public-relations campaign it could have a significant impact on the “social attitudes of the public at large and thereby channel American spending toward larger and more expensive diamonds instead of “competitive luxuries.” Specifically, the Ayer study stressed the need to strengthen the association in the public’s mind of diamonds with romance. Since “young men buy over 90% of all engagement rings” it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship.

Once the story took shape, De Beers started telling that story everywhere:

. . . the advertising agency [also] strongly suggested exploiting the relatively new medium of motion pictures. Movie idols, the paragons of romance for the mass audience, would be given diamonds to use as their symbols of indestructible love. In addition, the agency suggested offering stories and society photographs to selected magazines and newspapers which would reinforce the link between diamonds and romance. Stories would stress the size of diamonds that celebrities presented to their loved ones, and photographs would conspicuously show the glittering stone on the hand of a well-known woman.

The trend soon reversed, and diamond sales jumped.  When extensive mines found in Siberia threatened De Beers’ empire, what did they do?  They invited Russia into the cartel.  When those Russian diamonds turned out to be tiny?  They marketed diamonds based on cut, color, and clarity (instead of just on carat, as had been done up to that point).    All of this story-crafting worked:

By 1979, N. W. Ayer had helped De Beers expand its sales of diamonds in the United States to more than $2.1 billion, at the wholesale level, compared with a mere $23 million in 1939. In forty years, the value of its sales had increased nearly a hundredfold. The expenditure on advertisements, which began at a level of only $200,000 a year and gradually increased to $10 million, seemed a brilliant investment.

But this also presented a problem: 40 years of heavy sales meant that there were roughly 500 million carats of cut diamonds on fingers, wrists, necks, and in consumers’ safes around the world.  That was roughly 50 times the amount of diamonds mined by De Beers each year.  If even a small percentage of those diamonds ended up back on the market, prices would tank, or De Beers would be forced to buy and hold their own goods.  The solution?  Part of it was already underway: for years De Beers had been telling the public that “Diamonds are Forever”, not something you could simply sell if need be.  The other solution was market driven: nearly everything but extremely high end diamonds are sold at high markups, which means the places that make it easy for you to sell your diamonds offer just a pittance of what you paid for them.

The whole article is worth the read.