Dyer, Steel’s: A Forgotten Stock Market Scandal from the 1920s

I don’t normally include subtitles in my post titles, but in this case I’ve made an exception. Not only did I know nothing of the stock market scandal; I had never even heard of Steel’s. So I figured the reader might also need a little help. This new Syracuse University Press book by Dave Dyer, an independent investor, recounts the story of a man, Leonard Rambler Steel, who did “almost everything right. Almost.”

Steel was a visionary. He founded his company in the fall of 1919 in Buffalo, at that time a boom town and the eleventh largest city in America. By June 1922, “he had 225 business locations, including sales offices, five-and-dime stores, candy shops, and cafeterias. He had more than forty-five hundred employees and forty thousand investors.” He sold stock in the company directly to the public on an installment plan. His idea was not only to raise capital but to create loyalty: “if the customers actually owned the stores, why would they ever shop anywhere else?” (p. 9)

Steel envisaged a vast chain of large discount stores in small towns—forty years before Sam Walton opened his first Wal-Mart store. “A single large store in a small town that supplied almost everything people might want would be the principal, and probably only, retail outlet in the community. It would drive out existing competitors and discourage others just because of its size and range of merchandise. In addition, a chain of 1,600 of them would have enormous buying power, resulting in prices so low that no competitor could possibly compete.” (p. 78)

The Steel store in Denver was “the final embodiment of his retail theory. He built a store large enough to dominate a market with low prices and surrounded it with satellite stores that were fed from the same warehouse. The product selection was so wide that there would be little need to shop elsewhere. Low prices and high turnover would keep competitors out, keep customers loyal, and keep investors happy. More stores would mean more opportunities for his employees to grow with the company. It was all going to work, and L.R. was a hero to all.” (p. 81)

He asked his well-paid employees to help fund the construction of the Denver store. The four-story building with 53,000 square feet of space, including a cafeteria with seating for 500, opened on December 9, 1922, just in time for the Christmas shopping season. On the first floor was a candy store as well as women’s lingerie and hats. The balcony overlooking the first floor housed a beauty shop. On the second floor was a “totally furnished six-room bungalow that helped shoppers visualize their purchases in a homelike setting.” The third floor was a food market.

On the same day that the Denver store opened to great fanfare and overwhelming crowds, Steel’s opened two other department stores—one in Hamilton, Ontario, and the other in Buffalo.

Unfortunately, Steel’s, it turned out a month later, was out of money. The stores had never been profitable; sales volume could not compensate for the combination of high overhead and very low prices. Steel was forced to resign and a new management team took over. But they had no magic pill. They defaulted on a large loan and other creditors sued over unpaid bills.

The sale of stock in the various companies had been very profitable, “but it was stopped cold on February 20, 1923, when the Maryland attorney general issued an order restraining the sale of stock. … Although his order was effective only in Maryland, publicity from it made sales in other states difficult. The New York attorney general stopped all stock sales on March 1, 1923. … The New York State investigation showed that Steel’s was getting ready to sell $30 million in stock. They had already sold $26 million to about sixty thousand people, so they planned to pay the bills by more of the same. It might have worked, at least for a while, but they were not allowed to do it.” (pp. 106-07)

About three weeks later Steel died—broke. He had all his savings in the stock his now bankrupt company had sold. “There was not even enough money to pay his funeral expenses.” (p. 116) Investors in Steel’s were never compensated.

Steel was ahead of his time in many ways. He promoted women through the ranks, bought coal land to provide a consistent supply of energy for the company, and produced and showed three-hour infomercials to rapt local theater viewers (who were later visited by the company’s stock sales force). Dyer suggests that “if the stock-selling enterprise had not been so easy, so lucrative, and so tempting, he actually might have been more successful. With his energy and creative talent focused only on the business, and without an addictive stream of easy money, he might have been more like Wal-Mart and less like Enron.” (p. 133)