Chapter 46 - The Diamond Industry

Let me tell you about the diamond industry. Diamonds are either beautiful, or we believe them to be so. Even a monkey might stop and look at a diamond with curiosity. The monkey may discard the diamond when he perceives that the diamond has little use or he may keep it and give it as a present to another monkey. He may even find it useful to scratch things. So we might ask the question: Why do humans like diamonds? I can think of these possible reasons:

They are genuinely beautiful to humans.

Humans perceive them to be beautiful. The desire is caused by advertising or historical precedent. Advertising may delude a man into believing that he must demonstrate his love for a woman by giving her a diamond. The advertising informs women that a man only loves her if he gives her a diamond. Advertising plays some part in the demand for diamonds.

Diamonds are an investment.

I am suspicious of a falsely created demand. The logic is a bit shaky as it can be difficult to notice a fake diamond. If is is difficult to spot a fake diamond, why go to the expense of a real diamond? However, the way the supply of diamonds is controlled is of interest.

Diamonds are reasonably plentiful in society in the uncut form. There is an oversupply of raw diamonds. Part of the value of diamonds is value added when they are cut into the classical diamond shape. Much of the value of diamonds is maintained by restricting supply. The supply of diamonds to diamond sellers is restricted by a monopoly. Only enough diamonds are released to match supply. If excessive diamonds were released the value of all diamonds, including those previously sold, would fall. If supply is reduced, the value of a diamond may exceed the price people are willing to pay. So diamonds are released at a rate that maintains value and fulfils demand for new diamonds.

This has lessons for the mechanics of money creation. There is a demand for money because people need to pay the taxes, pay interest and living expenses. Money needs to be controlled in the same way as diamonds. Money can be created in large volumes, but it is released at a rate that matches demand and no more.