38 The Stock Market Crash—And After 
by their holding of stocks at the height of the 
market. 
For years the tax law on capital gains had dis- 
couraged the taking of profits on securities because 
their holders were unwilling to sell and pay the tax 
liabilities incurred; instead, they made new stock 
purchases, as occasion proved favorable, on borrowed 
money. The resultant rapid piling up of margin 
accounts during 1929 put the market in bad techni. 
cal position, making it vulnerable to bear attacks. 
Thus the capital gains tax operated to prevent 
outright selling and buying of stocks. It stimulated 
holders to enlarge their margin accounts because 
their own funds were locked up in held securities, 
thus subjecting them to the risks that finally over- 
threw the market. 
Nobody profited by this situation. The banks 
were burdened with the frozen credits of their cus- 
tomers, in the loans on collateral which they had 
taken over. The entire body of security holders 
suffered panic decline in the prices of their securities. 
The government reaped no revenue from the tax on 
securities, rather, it suffered losses in its income tax 
account because of the gigantic deflation of the 
market. A special warning on this subject was issued 
by the National City Bank of New York, as far back 
as April of 1929. This statement found in the capi- 
tal gains tax a root factor in the overextension of 
borrowings on the stock exchange which had led to 
a vulnerable credit situation. It said: 
“If one could check up on the people leaning on