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After the opium wars reached their bloody conclusion and China was pried fully open to European trade, the coastal city of Shanghai rapidly became the import/export capital of China and its most westernized city. A municipal opium monopoly had been established in 1842, allowing the city’s dozens of opium-smoking dens to be leased out to British merchants. This situation prevailed until 1918, when the British finally bowed to pressure from the government of Sun Yat-sen and relinquished their leases.
This concession did little to quell the Shanghai drug market, which duly fell into the hands of Chinese secret societies such as the notorious Green Circles Gang, which, under the leadership of Tu Yueh-shing, came to dominate the narcotics trade in Shanghai for the next thirty years, earning the gang lord the title of King of Opium. Tu acquired a taste for the appurtenances of American gangsters, eventually purchasing Al Capone’s limousine, which he proudly drove around the streets of Nanking and Hong Kong.
Tu was extraordinarily skilled both as a muscle man and an entrepreneur. When the authorities made one of their periodic crackdowns on opium smoking in Shanghai, Tu responded by mass-marketing “anti-opium pills,” red tablets laced with heroin. When the government took action to restrict the import of heroin, Tu seized the opportunity to build his own heroin factories. By 1934, heroin use in Shanghai had outpaced opium smoking as the most popular form of narcotics use. Tu’s labs were so efficient and so productive that he began exporting his Green Circles Gang heroin to Chinese users in San Francisco and Seattle.
Tu’s climb to the top of the Chinese underworld was closely linked to the rise to political power of the Chinese nationalist warlord General Chiang Kai-shek. Indeed, both men were initiates into the so-called “21st Generation” of the Green Circles Gang. These ties proved useful in 1926, when Chiang’s northern expeditionary forces were attempting to sweep across central and northern China. As Chiang’s troops approached Shanghai, the city’s labor unions and Communist organizers rose up in a series of strikes and demonstrations designed to make it easier for Chiang to take control of the city. But Chiang stopped his march outside Shanghai, where he conferred with envoys from the city’s business leaders and from Tu’s gang. This coalition asked the Generalissimo to keep his forces stationed outside Shanghai until the city’s criminal gangs, acting in concert with the police force maintained by foreign businesses, could crush the left.
When Chiang finally entered Shanghai, he stepped over the bodies of Communist workers. He soon solemnized his alliance with Tu by making him a general in the KMT. As the Chinese historian Y. C. Wang concludes, Tu’s promotion to general was testimony to the gangsterism endemic to Chiang Kai-shek and his KMT: “Perhaps for the first time in Chinese history, the underworld gained formal recognition in national politics.” The Green Circles Gang became the KMT’s internal security force, known officially as the Statistical and Investigation Office. This unit was headed by one of Tu’s sidekicks, Tai Li.
Under the guidance of Tu and Tai Li, opium sales soon became a major source of revenue for the KMT. In that same year of 1926 Chiang Kai-shek legalized the opium trade for a period of twelve months; taxes on the trade netted the KMT enormous sums of money. After the year was over Chiang pretended to acknowledge the protests against legalization and set up the Opium Suppression Bureau, which duly went about the business of shutting down all competitors to the KMT in the drug trade.
In 1933 the Japanese invaded China’s northern provinces and soon forged an accord with the KMT, buying large amounts of opium from Generals Tu and Tai Li, refining it into heroin and dispensing it to the Chinese through 2,000 pharmacies across northern China, exercising imperial supervision by the addiction of the Chinese population. General Tu’s opium partnership with the occupying Japanese enjoyed the official sanction of Chiang Kai-shek, according to a contemporary report by US Army Intelligence, which also noted that it had the backing of five major Chinese banks “to the tune of $150 million Chinese dollars.” The leadership of the KMT justified this relationship as an excellent opportunity for espionage, since Tu’s men were able to move freely through the northern provinces on their opium runs.
In 1937 the Generalissimo’s wife, Madam Chiang, went to Washington, where she recruited a US Army Air Corps general named Claire Chennault to assume control of the KMT’s makeshift air force, then overseen by a group of Italian pilots on loan from Mussolini. Chennault was a Louisiana Cajun with unconventional ideas about air combat that had been soundly rejected by the top army brass, but his fanatic anti-Communism had won him friends among the far right in Congress and in US intelligence circles.
Chennault resigned his commission, went on the KMT payroll, and set up operations in Nanking, where he worked side by side with Chiang Kai-shek and Tai Li. For nearly four years Chennault’s tiny air force lurked discreetly, ceding the air space of China to the Japanese imperial air force. Then came Pearl Harbor, December 7, 1941. Chennault made haste to Washington and pushed the idea that wise use of air power in China against the Japanese would be an excellent contribution to the war effort. He was duly furnished with 100 P-40 fighters and was allowed to recruit army and navy pilots and ground troops. Chennault called his operation the American Volunteer Group, but they soon became hallowed as the Flying Tigers.
The recruits to Chennault’s force were told that theirs was a covert mission and that under no circumstances should they reveal that they were in China with the knowledge of the US government. When the Flying Tigers were allowed to engage the Japanese they quickly established a formidable combat record, knocking down nearly 500 Japanese fighters. But for most of the war, because of the unofficial detente between Chiang and the Japanese occupiers, the pilots found themselves shuttling personal contraband for the KMT leaders – opium, gold, and other valuable commodities.
Chiang’s reluctance to fight the Japanese infuriated General Joseph “Vinegar Joe” Stilwell. Stilwell had no respect for Chiang, calling him “a peanut dictator” and describing the KMT nationalist regime as being based “on fear and favor, in the hands of an ignorant, arbitrary stubborn man.” Stilwell was also highly critical of Chennault’s strategy. The latter had convinced US commanders in Washington that the battle in China could be won by the strength of air power and by covert action alone. Stilwell correctly deemed this absurd, but he lost the battle for influence in Washington and became increasingly sidelined as Chennault rallied support for his position.
In the fall of 1942 the OSS made US Navy Captain Milton “Mary” Miles the head of its intelligence operations in China. Miles lost no time in forming an alliance with Tai Li, referring to this career gangster and opium lord as a “kindly labor union leader.” In his services as head of Chiang’s internal security force Tai was notably brutal, running dozens of concentration camps in which were held hundreds of thousands of Chiang Kai-shek’s political opponents. Tai was notorious for his use of poison, having a stockpile of arsenic made up to look like Bayer aspirin and Carter’s Little Liver Pills. In 1941 Tai had been arrested by the British in Hong Kong, who accused him of running “an intelligence organization modeled on the German Gestapo.” He was released only after the personal intervention of Chiang Kai-shek.
Tai Li bragged about maintaining an army of undercover agents spread not only across China, but in every major city in the world that had Chinese residents who might be supporting Mao Tse-tung, China’s Communist leader. Stilwell urged Washington to end its association with Tai Li, calling him the “Heinrich Himmler of China,” but once again his advice was ignored and with the approval of the OSS the United States and Tai Li entered into an officially sanctioned relationship, which Tai Li called the “Friendship Plan,” though it was formally known as the Sino-American Cooperative Organization, or SACO. Tai Li was put in charge of the new network and Captain Miles served as his deputy, the overall mission being espionage and sabotage against the Japanese in China. The Chinese were to supply the manpower, with the US furnishing training, money and weapons. The OSS even es
tablished an FBI school in Nanking to train Tai’s secret police in the use of police dogs, lie detectors and truth serums. Among the more remarkable instructors was a law enforcement delegation from Mississippi in the form of district attorneys and eight state troopers to impart their own indigenous knowledge of the use of police dogs.
Stilwell always believed that Chiang had no interest in fighting the Japanese and that the SACO operation was being used to assist in the KMT’s criminal enterprises: “The Chinese had a great nose for money,” Stilwell wrote in his diary, adding that the OSS man Miles “looked like he had lots of it.” Stilwell favored a US alliance with Mao, for whose troops he had great admiration, describing them as being “battle-hardened, disciplined, well trained in guerrilla war and fired by a bitter hatred of the Japanese.”
In 1944 Stilwell, based at the time in Nanking, sent a delegation of his staff officers to meet the Communist leaders, Mao Tse-tung and Chou En-lai. The Americans were warmly received and the Chinese Communists shared intelligence with them, taking them on a tour of their redoubt in the Yenan caves and allowing them to interrogate 150 Japanese prisoners.
Stilwell’s view that China would be better off under the leadership of the Communists did not survive a furious counterattack by Tai Li and the OSS officer Miles. Tai Li had placed SACO agents in Stilwell’s house and was well-informed about the general’s views. In fairly short order Chiang demanded that FDR remove Stilwell from his command for “working with the Communists.” FDR complied and the general abruptly departed. The KMT criminals, with a US intelligence organization at their disposal, had prevailed, with fateful consequences.
As the war edged to a close the US delayed making assaults on the Japanese in northern China as part of a plan to damage the Communists. Harry Truman described this strategy in his memoirs: “It was perfectly clear to us that if we told the Japanese to lay down their arms immediately and march to seaboard, the entire country would be taken over by the Communists. We therefore had to take the unusual step of using the enemy as a garrison until we could airlift Chinese national troops to south China and send Marines to guard the sea ports.”
After the war, Chiang and Tai Li welcomed into their ranks dozens of warlords who had collaborated with the Japanese. These men now worked side by side with the OSS and the US Marines in the war against Mao. The US military didn’t leave China until 1947, after channeling $3 billion in weapons and military aid to Chiang. This aid now gave way to covert US support for Claire Chennault’s newly named Civil Air Transport, or CAT. Chennault’s partner in this enterprise was a man with long-standing ties to US spy agencies, William Willauer. (He later showed up in 1954 in Central America as US ambassador to Honduras, when the CIA, using CAT planes and pilots, was readying the coup against Jacobo Arbenz’s moderate left government in Guatemala.)
The US government gave Chennault and Willauer cut-rate prices on a fleet of surplus C-46 and C-47 transport planes, and as pilots Chennault hired many of the veterans of the Flying Tigers operation. In Nanking these pilots lived in a blue house known as the Opium Den. At this point CAT was at least nominally a private enterprise, though underpinned by US government subsidies in the form of cheap planes and US contracts to fly supplies to Chiang’s forces, who were still fighting Mao. But by the summer of 1949 the Communists were on victory’s threshold. Chennault went to Washington and met with Colonel Richard Stilwell, who was chief of covert operations in the CIA’s Far East division. Chennault said that his airline was in dire financial straits, but nonetheless could fulfill a vital role in covert operations against Mao. Stilwell and his deputy, Desmond FitzGerald, thereupon approved what was in practical terms a CIA buyout of Civil Air Transport. They gave Chennault $500,000 in cash and began using the airline as a front for CIA operations throughout the Far East.
One of the first of these CIA-controlled CAT operations in China was to aid the ill-fated campaign against Mao by General Ma Pu-fang, whose army of 250,000 Muslims in northwest China had been crushed by the People’s Liberation Army. The CAT planes rescued General Ma and his fortune, estimated at $1.5 million in gold bars, much of it garnered through his control of the region’s opium trade. In 1950 the CAT planes began dropping food and guns to KMT general Li Tsun-yen’s forces in southern China. The aid did not turn the tide, and the general’s forces began to flee south into Burma. Li himself was airlifted by CAT to Taiwan, where Chiang Kai-shek had now installed his government.
Voyaging to Washington, General Li began promoting the notion that his forces in Burma could – with suitable US backing – return to China, wage war on the Communists and recapture the province of Hunan. Truman soon signed orders authorizing the CIA, with a budget of $300 million, to undertake covert actions on the Chinese mainland. As Mao threw the People’s Liberation Army behind the North Koreans and hurled General MacArthur’s forces southward down the peninsula Truman became obsessed with the opening of a so-called southern front to harry southwest China from Burma. So, in February 1951 planning for Operation Paper began: the invasion of China by KMT troops from the Shan States, all supposedly taking place without the knowledge of the Burmese government, the US State Department, the US ambassador to Burma, and the CIA’s own deputy director of intelligence, Robert Armory, who was less than enthusiastic about any relationship with Chiang or the KMT.
Although General Li Tsun-yen had told Truman that there were as many as 175,000 KMT troops ready to be thrown into the fray, the actual KMT forces in Burma amounted to no more than about 5,000, and they were under the command of General Li Mi, whom we encountered at the start of this chapter. His forces had been chased out of China a year earlier, in January 1950, and had exerted themselves since then in waging war on the Karen hill tribes in the Shan States, soon obtaining the upper hand and using this victory to tax the opium farmers.
The makings of a classic CIA/drug paradigm were now in place. Starting on February 7, 1951, CIA planes began to shuttle arms and supplies from Bangkok to Li Mi’s forces in north Burma, at first in the form of air drops five times a week and then with landings at Mong Hsat, an airfield constructed by the CIA fifteen miles from the Thai border. For the return journey the CIA planes were often reloaded with raw opium, which was flown back to Bangkok or Chiang Mai in northern Thailand and sold to General Phao Siyanan, head of the Thai police. General Phao had been made director of Thailand’s national police after the CIA-backed coup in 1948 led by Major General Phin Choohannan. Phao’s 40,000-member police force, the Police Knights, immediately engaged in a campaign of assassinations of Phin and Phao’s political enemies. These troops also assumed control of Thailand’s lucrative opium trade. In Phao’s able hands the supply of cheap opium from the Shan States made Bangkok the hub of the Southeast Asia opium trade, according to the British Customs Office. Phao’s control of the opium trade was directly abetted by the CIA, which had funnelled him $35 million in aid. Thailand would thereafter become the CIA’s main base of operations in the region.
In the 1950s the CIA backed General Phao in a struggle with another Thai general for monopoly of control of Thailand’s opium and heroin trade. Using artillery and aircraft supplied by the CIA’s Overseas Supply Company, based in Bangkok, Phao easily outgunned his rival and duly imposed near total control over the government of Thailand and the country’s criminal enterprises. Backed by squads of CIA advisers, Phao set about the task of turning Thailand into a police state. The country’s leading dissidents and academics were jailed and CIA-trained police reconnaissance units patrolled the countryside, among other activities levying a protection fee on the opium caravans. In addition to controlling the opium and heroin trade, Phao also cornered the country’s gold market, played a leading role on the top twenty corporate boards in the country, charged leading executives and businessmen protection fees and ran prostitution houses and gambling dens. Phao became great friends with Bill Donovan, at that time US ambassador to Thailand. Donovan was so enamored of Phao that he put him up for a Legion of Merit award. This f
or a man described by one Thai diplomat as “the worst man in the whole history of modern Thailand.”
The military aspect of the venture was less efficiently executed. Li Mi’s troops managed three forays into China. The first, in June 1951, lasted only a week. The next, in July, ended in disaster within a month, with 900 dead, including several CIA advisers. The final bid came in August 1952 and went equally badly.
The weapons going to the KMT were supplied by a CIA front company called Overseas Supply, run by a CIA lawyer called Paul Helliwell, an old Asia hand who had worked in China and Burma with the OSS. Helliwell later bragged about paying his Asian informants with “sticky brown bars of opium.”
The CIA’s operation in Burma had been deliberately kept from the US ambassador in Rangoon, William Sebald, who had faced a barrage of complaints from the Burmese government. Sebald confronted Secretary of State John Foster Dulles over persistent accusations that the CIA had been assisting KMT troops in northern Burma, and was assured unequivocally that there was no involvement. Armed with such reassurances Sebald relayed this to General Ne Win, the Burmese army’s chief of staff. Ne Win interrupted the diplomat, saying “Ambassador, I have it cold. If I were you, I’d just keep quiet.”
Burma took its grievance to the UN, bringing along captured caches of CIA-supplied weaponry. The American response to these charges was that the KMT had been buying its weapons on the open market with money generated from the opium trade. Finally, under mounting international pressure, the US agreed in 1953 to evacuate the KMT. The operation was supervised by Bill Donovan and Thailand’s General Phao. General Phao would not allow any representatives of the Burmese government to witness the evacuation, and in fact the majority of those who departed were women, children and injured soldiers, leaving behind more than 5,000 well-armed KMT troops who continued to assert control over poppy cultivation and the opium trade. They also joined forces with rebel hill tribes in a war against the Burmese army.