BUSINESS disputes arise in all industries, and the diamond industry is no exception. Unlike the situation in many other industries, however, diamond industry disputes are resolved not through the courts and not by the application of legal rules announced and enforced by the state. The diamond industry has systematically rejected state-created law. In its place, the sophisticated traders who dominate the industry have developed an elaborate. internal set of rules. complete with distinctive institutions and sanctions, to handle disputes among industry members. This article explores the reasons that this system of private governance has developed and endured within the diamond trade. Section II provides a brief overview of the diamond industry. It sketches the workings of the international diamond cartel and discusses diamond production and valuation. Section III describes the organization of the market for rough and polished diamonds, paying special attention to the role of trading clubs (bourses). It focuses on the terms and structure of transactions and details the workings of the bourse's private arbitration system that keeps all judgments secret as long as they are promptly paid. Section IV is the core of this article. Section IVA briefly considers why diamond dealers need to make executory contracts; it then explains that the diamond market also operates as an implicit loan market. Section IV B compares the cost of entering into legally unenforceable (extralegal) agreements to the cost of entering into legally enforceable contracts. It