This year Americans will spend $5 billion on a few pounds of stone ornaments measured out in carats, an ancient standard based on the uniform weight of a carob seed (about 1/ 142nd of an ounce). But then, no bauble so betokens wealth, power and romance as a diamond. Long favored by crowned heads and commoners, Hollywood royalty and countless brides-to-be, it has likewise dazzled speculators, especially during the 1970s boom in so-called "investment diamonds." Among the most prized of these were one-carat white stones categorized as "D-flawless." Since 1980, however, the investment diamond market has turned to dust, with the typical diamond-studded portfolio now worth a fraction of its purchase price—if a buyer can be found at all. To investigative writer Edward Jay Epstein, author of The Rise and Fall of Diamonds (Simon and Schuster, $14.50), the crash in the speculative market has exposed a fatal flaw in the entire diamond trade. "A diamond is merely a glittering pebble, " insists Epstein, 47. "It's a semiprecious stone, fairly abundant, that should be inexpensive to buy." Prices are unduly high, he claims, because the giant De Beers Consolidated Mines of South Africa has ruled the world of diamonds as a virtual monopoly for more than 50 years. Now De Beers is overextended, according to Epstein, and in danger of undermining its own slogan, "A Diamond Is Forever." Epstein, a New York City native who lives alone on Manhattan's East Side, has written five works of nonfiction, including Legend: The Secret World of Lee Harvey Oswald, and a novel. Epstein discussed his controversial views on the diamond market with John Stickney of PEOPLE.

Should people be concerned about the value of their diamond jewelry?

Absolutely. But people want to believe in something they can carry, an amulet. They don't understand municipal bonds or treasury bills. They do understand, "Here's a magic stone, it glistens, you can look at it, wear it and it'll be worth as much money as you need, on demand." Trouble is, it's not magic, and when you try to sell, often it's worth next to nothing.

Aren't you drastically underestimating the worth of diamonds?

In May there was an article in the Washington Post by a free-lance writer who had just taken around a diamond ring once appraised at $3,950 to 15 local stores. The offering prices ranged from no bid to $750. Of course, spectacular diamonds like the 69.42-carat Taylor-Burton—the kind that sell at auction—usually do go up in price.

But didn't the average investment diamond appreciate at better than 25 percent a year during the 1970s?

Yes. So long as everybody believed paper money was collapsing and diamonds were going up, they did go up. But when they saw diamonds could go down as well, they panicked. A friend of mine bought $3 million in diamonds and finally unloaded them last year for less than $500,000. Diamonds may be beautiful objects of sentiment or status, but they should never be considered as investments.

Why hasn't the price of diamonds sold in jewelry stores come down?

A diamond used for a ring is a commercial grade—with a slight imperfection invisible to the naked eye—and it's now worth about $2,000 a carat. De Beers hasn't yet lost control of the flow of diamonds, but they will soon. And when they do, there will be so many diamonds around you will be able to name your price. Diamond prices have come down a little, but it's still a fixed market, an artificial scarcity.

Why is it an "artificial scarcity"?

Diamonds are simply a form of carbon, compressed under volcanic heat and pressure. From biblical times until the 1870s they were indeed rare. They were usually found at random, often in streams. The number of diamonds in the whole world could be measured in seven or eight ounces. Then diamonds were discovered in South Africa in volcanic pipes, miles-deep pits full of a blue ore called kimberlite. For every ton of it you get so many diamonds. By 1880 four or five South African mines were each yielding one to two million carats a year.

Are diamonds difficult to mine?

Not compared with coal or copper. In kimberlite mines you take them out in an open-pit operation. A steam shovel comes in, picks up the ore and puts it in a truck, which dumps it on a conveyor belt. The separation of ore from diamonds is relatively easy because of the different weights of the minerals. Diamonds don't require a lot of labor or smelting, and you can ship them in an attaché case.

How did De Beers become king of diamonds?

As a young man in 1870, Cecil Rhodes came out from England to South Africa, joined his brother, Herbert, and started working a diamond claim on a farm owned by brothers named De Beers. Rhodes eventually realized that, with so many diamonds coming onto the market, the only way to keep prices high was to consolidate the mines and control supply. By the turn of the century most of the mines were part of De Beers, which gradually bought up much of the diamond distribution network also. Diamonds weren't rare, but nobody knew it because only enough were produced to create the illusion of rarity.

Hasn't anybody ever challenged the De Beers monopoly?

When mines opened around the world that De Beers couldn't control outright, they would just draw on their own profits to buy up as much of the new production as possible, thereby swallowing the competition. Until now the biggest threat to De Beers was the Depression, when people just about stopped buying diamonds. World War II made diamonds valuable again, as abrasive dust used in industry. And after the war, of course, everybody wanted a diamond engagement ring.

What is the extent of world diamond production today?

About 50 million carats a year, and it will be 100 million by 1985. An enormous new mining region in Australia is expected to produce 10 to 20 million carats. New sites have also been discovered in Brazil, Venezuela, Guyana and Guinea.

How can De Beers afford to buy out so much competition?

That's the problem. The Soviet Union and Zaire, already major diamond producers, are both upping their output. I reckon it would cost De Beers $2 billion a year to buy diamonds for the next five years, and I don't think they can find the money.

Haven't the Soviet Union and Zaire sworn not to trade with South African companies?

Hypocritical as they are, the arrangements testify to how lucrative diamonds are. The Soviets aren't going to turn down an enormous cash windfall, and the black African nations have to support themselves. They don't sell diamonds direct to De Beers. The company has set up intermediaries all over the world.

How much of the world diamond market does De Beers still control?

They like to give the figure as 80 percent, though I'd say it's now well under 50 percent. The people I spoke to at De Beers take pride in being able to manipulate the market. Part of the illusion they like to nurture is that they are indeed a cartel, and powerful enough to protect the value of diamonds. If there's a free market, diamonds will seek their own value. So far De Beers has succeeded brilliantly. But I'm convinced the whole illusion is about to shatter.

Would a collapse in diamond prices rock the world economy?

It may be beneficial. In the future an American buying a diamond engagement ring may have to spend only one-tenth as much as he would today—and the savings would go into the U.S. economy, not South Africa's.

What do you think of synthetic gem diamonds?

Experts looking at good fakes and real diamonds with the naked eye often have a hard time telling them apart. If you like sparkle, you can have the most beautiful three-carat fake for $300. People should be allowed to pay whatever they want for beauty. In the diamond market the swindle occurs when consumers—particularly young engaged couples—are led to a quarter-carat stone and asked to spend their savings on this tiny imperfect diamond that can never be resold.

Are diamonds fated to lose their luster completely?

In Holland during the 1630s there was a tulip craze. People thought they were rare, with only so many bulbs around, and incapable of being bred. They paid the equivalent of thousands of dollars for a single bulb. Suddenly the bubble burst and the value of tulips went to seed, so to speak. Within this decade, the same will happen with diamonds.