PART III

10

THE DIAMOND BUBBLE

A new bout of diamond fever struck southern Africa in 1881, prompted by the formation of a host of joint-stock companies in the diamond fields as the era of independent diggers came to an end. The rush to invest in joint-stock companies was as hectic as the original diamond rush of the 1870s. Speculators thronged the main diamond market in Ebden Street in Kimberley, where a new stock exchange was established to accommodate the huge increase in business:

Ebden Street [wrote Dr Matthews] was filled from morning to night with a tumultuous and maddened crowd. The various offices of companies in formation were simply stormed, and those who could not get in at the door from the pressure of the crowd, threw their applications for shares (to which were attached cheques and bank notes) through the windows, trusting to chance that they might be picked up . . .

It was astonishing how the mania seized on all classes in Kimberley, from the highest to the lowest . . . how everyone, doctors and lawyers, masters and servants, shop-keepers and workmen, men of the pen and men of the sword, magistrates and I.D.B.s [illicit diamond buyers], Englishmen and foreigners, rushed wildly into the wonderful game of speculation.

Following the launch of De Beers Mining Company in April 1880, more than seventy joint-stock companies made their debut on the market within a year. Claim-holders forming joint-stock companies made their own valuation of their assets, set the capital of the new enterprises, took shares equivalent to the value they claimed for their holdings and then offered the remainder to the public. As merchants and bankers in Cape Town and Port Elizabeth scrambled to join the buying frenzy, the competition for shares became so intense that stock in 1881 traded at premiums ranging as high as 300 per cent.

In the case of De Beers, the claim-holders valued their ninety claims at £200,000, floated the company with a nominal capital of two thousand £100 shares, divided 1,900 shares among themselves, and offered the remaining 100 shares to the public. Rhodes and Rudd each acquired 280 shares. When the Barnato Company was floated on the share market in March 1881, at the height of the diamond boom, its four claims were valued at £25,000 each; within an hour the £75,000 worth of shares on offer were subscribed twice over and after two days they were selling at a premium of 25 per cent.

Some claim-holders made huge fortunes. One former digger, William Knight, whose claims were valued at £12,000 in 1880, sold out for £120,000 and left for England. J. B. Robinson sold 913 Standard £100 shares in March 1881 for £194,640, more than double their nominal value. One financial agent in Kimberley, involved in floating five companies requiring a capital of £496,000, took in £1,230,000 over a three-week period.

As well as promoting viable companies, some claim-holders owning worthless or poor ground took advantage of the clamour for diamond scrip to launch new ventures, knowing that they had little or no chance of success. Indeed, the greatest volume of dealing took place in shares not of well-known companies but of dubious new ones. ‘It was evident,’ wrote Dr Matthews, ‘that it mattered very little to the general public, or the majority at all events, what the company was, what the value of the claims might be or where they were situated; so long as it was a diamond-mining company it was quite sufficient to commend public favour.’ Claim-holders in the two richest mines, Kimberley and De Beer’s, tended to hold on to their most valuable claims there but to use cash they had raised from limited sales to buy up poorer claims in the other two mines, Dutoitspan and Bultfontein, and then sell them to colonial investors at inflated prices. By the end of 1880, claim prices had risen by 50 per cent in Dutoitspan and 75 per cent in Bultfontein. Some claim-holders with capital often invested everything they had in a single company to boost its share price, secure a quick profit, and then reinvest in a new venture.

Another scam involved claim-holders acting in collusion with each other to force prices higher. The Diamond News reported in March 1881:

There appears to be a ‘ring’ here, and every person in it has received an allotment of shares from each company, while the capital of the general public is received and politely returned. Immediately the shares are quoted at a premium and the outsiders are glad to pay it to get into what is apparently a good thing, but which has only been made to appear such by the chicanery of the promoters and their supporters.

Some leading Kimberley figures engaged in dubious dealings. The town’s mayor, J. B. Robinson, endeavoured to offload some poor ground he owned in Kimberley mine by floating a new venture, the Crystal Diamond Mining Company, with a capital of £160,000, three times its assessed value. In a review of new companies published in September 1880, the Dutoitspan Herald pointed out that some of the Crystal claims were ‘worse than valueless’.

Cecil Rhodes was also heavily involved in company promotion. Not only did he become director of seven diamond-mining companies, he also sat on the board of water, coal, tramway, loan, steam laundry and theatre companies. Like Robinson, he helped set up new ventures stuffed with claims of little value selling shares at a high premium. Poor claims shed by De Beers were put into the International. The claims were floated at £3,700 each and the company was capitalised at £131,700. The International slipped into debt, failed to pay dividends, was put into liquidation and then sold back to De Beers for the knock-down price of £18,974. Another company promoted by Rhodes was the London and South African, which became a hold-all for poor ground in the West End of De Beer’s mine. Its 96 claims were valued at £1,500 each, but it was a bogus operation. It never went into production, but lent its funds to another mining company for a fixed rate of interest. De Beers subsequently bought one third of the company at a bargain price and then absorbed it altogether.

The most notorious of Rhodes’ ventures was the Beaconsfield Diamond Mining Company. It was formed out of twelve claims discarded by Jules Porges’ Compagnie Française. The assessed value of the Beaconsfield claims, according to an Inspection Report subsequently made in November 1881 by the Standard Bank, was £40,395. But the promoters valued the claims at £10,000 each and they were paid three-quarters of the £132,000 capital. ‘Such companies should be sorted out as soon as possible,’ said Inspector Rennie of the Standard Bank, ‘and an example made of a promoter here and there.’

The boom, however, was short-lived. The values placed on Kimberley’s mining companies had soared far beyond their production capacity. By the middle of 1881, the total nominal capital of £7 million was more than twice the officially assessed value of the mines in 1880. Not only had claim-holders floated companies at excessively high values, they had then spent the proceeds on further speculation in other companies or on paying out dividends to impatient investors demanding a quick return on their money; no more than 10 per cent of the total capital of the companies floated was retained for investment. None of the companies possessed reserve funds.

Moreover, the boom had been fuelled largely by credit. Initially, all share transactions were for cash, but the spectacular leaps in prices encouraged speculators to buy on credit. At the outset, banks willingly made advances for the purchase of scrip, but then began to take fright. In April 1881, the Standard Bank said it found it ‘necessary to check the speculative mania before it assumed greater dimensions’ and refused to accept company scrip as collateral for loans. As the bubble burst, Kimberley’s mining magnates looked to foreign investors in England and Europe for salvation. They were the only sources of capital that remained; local sources of capital in Kimberley and the Cape Colony had long been exhausted. But foreign investors steered clear.

The collapse was precipitate, ruining hundreds of investors. Shares that had traded at £400 each in March 1881 fell to as low as £25. One of the casualties was Andrew McKenzie, a prominent Cape Town dock agent and building contractor who in early 1881 had begun speculating in diamond shares on a ‘gigantic scale’:

It appears to have been his misfortune that his first speculations proved successful [wrote his liquidator] for . . . misled thereby or prompted by a natural love of speculation he plunged madly into the excitement. He appears to have bought into every company . . . in many instances beyond the highest market rates giving his bills with pledges of shares in payment of his purchases which altogether amounted to £300,000.

McKenzie’s bankruptcy in December 1881 detonated a commercial crisis in the Cape Colony that lasted for several years.

Rhodes, Rudd, and most other Kimberley magnates managed to weather the storm. In March 1881, De Beers merged its shares in a deal with an even larger group of claim-holders led by Frederic Philipson Stow, giving it an unassailable hold on the mine and enabling it to withstand the fall-out from the crash more readily.

But Kimberley’s reputation around the world was wrecked. ‘It may be safely said,’ wrote Dr Matthews, ‘that in its rash and reckless speculation Kimberley was almost guilty of financial suicide, for not only was an all but fatal blow given to the industry which supported the place, but all confidence in its resources was for a time destroyed in the minds of its colonial neighbours and the home investing public.’

The general manager of the Standard Bank concurred: ‘No immediate improvement can be expected,’ he wrote in November 1881, ‘as the diamond share market is now thoroughly discredited.’ An editorial in the Griqualand West Investors Guardian commented at the end of the year: ‘There is no use denying that we have botched our own affairs to a very considerable extent.’

The dire straits into which the mining industry had fallen were compounded by a host of other problems. Independent companies operating in the same mine produced the same kind of difficulties that small claim-holders had faced - only on a much larger scale; working at different depths, they undercut each other’s operations. Open-cast mining also became increasingly hazardous. As a result of fallen reef, only one-third of the claims in Kimberley mine were workable in 1881. Neither the companies nor the Kimberley mining board could raise sufficient funds to remove the reef. Then the price of diamonds collapsed. In 1882, a depression in the European diamond market, caused in part by overproduction in Kimberley, nearly halved carat prices and sent one-third of Kimberley’s companies to the wall.

The big players once again survived, profiting from the demise of smaller competitors. They also acquired an appetite for political action to promote their own interests.

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