How Much Profit?

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In 1942 the U.S. railroads turned in a net operating income of $1,480,000,000, which will probably result in net profits of $960,000,000, the highest on record.

These earnings, announced last week by the Interstate Commerce Commission, brought out charges so bitter that one might have supposed that the railroads not only had made big money but had made it through the devious exploits of a Gould, Fisk, or Daniel Drew.

Bulk of the charges were made by representatives of Economic Stabilizer James F. Byrnes and Price Administrator Prentiss M. Brown, who have petitioned ICC to wipe out railroad rate increases made early in 1942 to meet mounting labor costs. These increases in costs were more than offset by the big increase in railroad operations which resulted in spreading overhead and raising profits. The rates, according to OPA, are now endangering many a price ceiling, and are resulting in wholly unjustified profits.

According to OPA's economist Richard V. Gilbert, known for his studies in national income analysis, and an all-out advocate of peacetime Government spending, the U.S. rails should not be allowed to earn over 3% on money invested in the railroads, since investors in U.S. Government bonds get no more than that. Carried to its logical conclusion, this argument implies that investors in private industrial enterprises run no more risks than investors in war bonds, or conversely, that U.S. Government credit is no stronger than that of the railroads which in times past have gone through a bankruptcy. Moreover, while last year the rails earned about 5% on their total property investment of some $28 billions, their earnings from 1930 to 1940, according to ICC, averaged about 2%.

Dubious in economics, the case of OPA is stronger in terms of pressure politics. Biggest (but unmentioned) reason for its concern with high railroad earnings is the fear that big rail profits will make it impossible for the Government to sidetrack the demand of the railroad operating brotherhoods for further wage increases of $3 a day and of the nonoperating unions for 20¢ an hour. These increases, if granted, will add some $750,000,000 to railroad costs (or almost enough to wipe out 1942 profits) and put that amount of money directly into the hands of railroad workers, who will spend it with inflationary results.

At week's end the decision of the Commission was still to come. But already it has propounded a sense-making proposition which may become the basis of a compromise. This is that all rail earnings which are caused by the rate increases of 1942 shall be allocated to improvements and to railroad debt retirement, which has already been big (TIME, Feb. 8). First advantage : as railroads retire debt, the effect is deflationary. Secondly, the retirement of debt now will put the rails in better postwar position to compete for traffic. The logical time to reduce rates is when traffic falls off.