The Business of Opium

With Yokoyama in charge and the Toyo Club’s commitment to grow a wholesale drug business, Yamamoto found himself in a new role: general manager. He was fully responsible for making the opium business work. While Yokoyama still relied on him to keep tabs on other parts of the business, Yamamoto focused on building the wholesale opium business. Maybe unsurprising, an illegal business looked much like legitimate businesses but with greater complexity to deal to the issues arising from the illegal nature. With little business acumen or knowledge, he relied on smarts and knowledge he had acquired on the job -- leverage relationship and force. Much of his time was spent on the road, up and down the coast. 

His chose a risky plan – scale up all parts of the business at once. He could have incrementally increased the drug flow by a small amount (say 30%) but Yamamoto reasoned that a completely new and fundamentally different infrastructure would be needed to handle 10 times or 100 times the drug flow. And that could only happen with a disruptive change, not incremental.


Across the Pacific

Transporting drugs across the Pacific was his first concern. First, he increased the Toyo Syndicate’s shipping/fishing fleet in Seattle, Los Angeles, and Alaska by 100%. He traveled to Los Angeles and Alaska to set up these relationships. Southern California was difficult because he needed to do this without cooperation of the Little Tokyo Syndicate, who likely also wanted a cut of this business. Further they competed with the Toyo Club on a retail level with the Asian community on the West Coast. So, Yamamoto chose to commit to a small town north of the Los Angeles basin – San Luis Obispo. A gambling business existed there, but, as with many of the local clubs, it only had loose affiliations with the bigger syndicates. Yamamoto made them an offer they could not refuse – if they helped him build out the fishing and shipping fleet (and later the cannery operations), he’d cut them in on the wholesale drug business. It was indeed a lucrative offer to the local club – and an opportunity to bring them into the Toyo Club sphere of influence. Alaska and Seattle were much easier to manage. The Toyo Club all ready had fishing and canning strongholds here – outside of the reach of the Little Tokyo Club. But, as with San Luis Obispo, money from the drug business would be an ideal way to bring these operations into tighter control.

Yamamoto knew that the fishing business alone could not support the large-scale shipments of opium. He was keenly aware of another industrial trend at work – containerization. Namely, a disruption in the transportation business was in the works. Standardization of shipping containers was transforming the transportation business. The cost of transportation was going to drop precipitously and the volume of transported goods would go up exponentially. A transportation network where goods from Asia to any place in the world was developing. Yamamoto decided that this was the path to large-scale transportation of drugs across the Pacific. Certainly there would be regulations, import/export issues, security concerns, and legal issues to overcome. However, the Toyo Club’s control of union activities and union workers would enable this. Further, it’s competencies in paying off businesses and bribing government officials would make this relatively easy. The throughput of the “public” transportation network had “elastic” scalability. If the Toyo Club Syndicate needed to ship a little or ship a lot, this emerging transportation network could handle it.

That Ain’t Fish We’re Processing; Or Maybe It Is

After visiting Shanghai, Yamamoto now realized that he would not have to process poppy. Being not so knowledgeable about the source side of the business until then, this was a pleasant surprise. However, the “finished” goods still needed to be measured, tested, parceled and directed to their retail destinations. Using the canneries that were all ready in place was the ideal way to do this. They were retrofitted and expanded. At the same time, Yamamoto decided to upgrade and expand all of the cannery operations as well. Once the demolition began, Yamamoto reasoned that he might as well as take the opportunity to grow this side of the business as well. Further, expanding the cannery was a sleight-of-hand maneuver to divert attention away from the drug-processing infrastructure that was being put in place. Local officials happily celebrated the economic growth and development of fishing and canneries. Of course, many still needed to be bought off, but it was a good cover story.

Transporting drugs across the Pacific to Alaska was easier than moving them to Seattle or San Luis Obispo. It was outside of the watchful eye the government and the competition (namely the Little Tokyo Club). Further, the nautical distance traveled was much shorter. However, there were no convenient overland routes or systems to get the goods to the lower 48. states. So, the Toyo Club relied on its fishing fleet to first get the drugs to Seattle. Under the guise of fish, drugs would be smuggled down the coast from Alaska. Given this, Yamamoto decided not to bring drugs overseas directly into Seattle. Nor would he process drugs here. Instead, Seattle would serve only as a transfer point.

Eliminating processing in Seattle brought relief to Yamamoto. A drug processing operation would have drawn much attention. And processing drugs was a dirty business. As merely a transfer point, the Toyo Club could keep its hands literally clean, even though figuratively they were quite dirty. Yamamoto remembered a Western adage,

“Don’t Shit Where You Eat.”

This seemed to apply.

Warehousing and Distribution Centers

In order to distribute the goods to Capone’s organization, Yamamoto needed to build transfer points. He decided to build two large distribution centers, one in Chicago and one in Las Vegas. Yamamoto planned to consolidate shipments of drugs into large parcels that Capone’s organization would take in bulk. He would attempt to require Capone’s organization to breakdown the parcels for distribution to Capone’s retail channels. Getting the processed drugs from San Luis Obispo and Seattle to Las Vegas and Chicago was handled by large shipments in trucks privately owned, managed, and driven by the Toyo Club. Yamamoto experimented with shipping goods through the public railroads (again leveraging the evolving economic scale of containerization) but it was deemed too risky. Securing the goods proved to be too difficult.

Why Chicago? Yamamoto was keenly aware Capone was interested in expanding his businesses to the West Coast. To bring him west to transfer drugs would be an implicit invitation to expand into the Toyo Club’s territory. Yamamoto wanted to keep Capone at arms length. By putting a warehouse in Chicago (actually in Cicero, a smaller town just outside of Chicago) where Capone ran his operations, it would be conveniently close for Capone, far away from the Toyo Club’s operations. Conversely, it also provided the potential opportunity/foothold for the Toyo Club to expand into Capone’s territories.

Why Las Vegas? Yamamoto knew Capone had his sights on Las Vegas – a lucrative way to (legally) grow his gambling empire. While legalization of gambling was still years away, Yamamoto established a coordination point in Nevada, just on the other side of the California boarder. It was a land grab Capone was all ready making, but its development was nascent (gambling wouldn’t be legalized until 1931). Since Capone had all ready established a “beach head” this far west, might as well use it as a convenience, Yamamoto rationalized. Further, it would signal an alliance between the Toyo Club and Capone to the Little Tokyo Club. Such an alliance would indeed be of concern, if the two combined forces were perceived as a competitor to the Little Tokyo Club.

The two large warehouses concentrated all the drugs in two locations. Building the physical infrastructure was not difficult, and the Toyo Club had a large pool of people from its union connections to staff them. Understandably, physical security was of utmost importance. Barbed wired fences surrounded the camouflaged compounds, and armed guards protected the facilities 24 hours a day.

There were many risks to large, centralized operations in Chicago and Las Vegas. Their sheer size made them difficult to hide. Security was extremely important. The amount of drugs stored in the warehouses would be tempting. Forces wanting to get access to drugs included Capone, the Little Tokyo Club, and a bandy of others that wanted drugs – some were professionals, others were amateurs or users that caught wind that were drugs to be had. Last, police and federal officials were also aware of these operations. Large and frequent payoffs, especially with the local police, were necessary.

That said, Yamamoto believed this to be the correct architecture. It simplified his operations. He only needed to deal with drugs in bulk, forcing Capone to deal with breaking down large parcels and managing the retail distribution. Further, Chicago and Las Vegas were “choke points” in the network, allowing Yamamoto to minimize the Toyo club’s interaction with Capone’s empire.

Capone too was concerned with the Toyo Club operations infiltrating into his empire. He was supportive of this arrangement. By concentrating the hand off in two locations and taking drugs in bulk, he could limit the people and interactions with the Toyo Club, even though he would take on the burden of parcel breakdown and complicated distribution to end customers. This enabled Capone to block the Toyo Club from entering their retail business in his territory and keep Yamamoto in check. It was a “loose coupling” between the two organizations with a well-defined and narrow interface.

Priming the Pump: Bringing the Supply Chain Online

It took two months to put the entire supply chain in place. Not all the boats were in place, cannery operations were not fully operational, and only small “test shipments” of small amounts drugs were moved across the Pacific Ocean on fishing boats and the “public” transportation network. The San Luis Obispo and Seattle to Chicago and Las Vegas transportation mechanisms were just starting to come online and the warehouses were just being completed. In short, only a small amount of drugs had passed through the entire supply chain to the distribution centers in Chicago and Las Vegas.

Toyama helped coordinate the poppy in the field to opium and heroin in the processing centers. Local men working with Toyama got the drugs on to fishing boats and container ships.

At first, several small shipments left Tokyo – some via fishing boat, the others via container ship. Weeks later, shipments arrived at San Luis Obispo and Alaska. The canneries were ready. At low volume where the canneries could handle a much larger capacity, the drugs were easily processed. Overland shipments were made to Chicago and Las Vegas, where Toyo Club employees and Capone’s men waited. In the darkness of night in both locations, the first shipments were successfully delivered.

With initial success, the Toyo Club slowly ramped up operations. There were many glitches, thousands of details, operational mistakes, and bad actors -- all expected problems when scaling up a large logistics operations. Of course, a whole lot of additional problems arise when one was running an illegal operation. “Fortunately” there are some additional solutions to problems when running such a business – extortion, bribery, violence, and murder were often the tools of success. Months pass, more and more drugs flow through the system, as the kinks get worked out. Thousands of dollars a week were flowing through the system, with the Toyo Club only capturing 10% of that. The goal was to push ten times that amount through the network, with a capture of over 50% of the value. Incremental improvement would help but Yamamoto realized the problem was at the source – back in China. Not surprising, Toyama was not so effective in managing the sources. As a leader, Toyama was certainly capable of setting up strategic relationships. However, operating and managing an agricultural product in a complex ecosystem was not his expertise, interests, or priorities.

A Man Named Santos

Yamamoto saw the problem first hand – he was in Anchorage, overseeing operations there. The assistant foreman, Rudy Santos, was a brilliant operator. The complex machine he had put in place was a model of operational excellence. Once product was unloaded from fishing boats, the opium and heroin was quickly processed and on it’s way to Seattle. Unfortunately, the amount arriving was only a sporadic trickle of unreliable quality and unpredictable quantity. Clearly the problem was not the cannery operations or Santos. It was upstream – but probably not the boats; that were also under Santos control, at least on the Alaska side. Yamamoto concluded it was on the source side outside of the Toyo Club Syndicate network. He needed to deal with the suppliers – most likely the Green Gang. And, he decided he would handle it himself – he would go to Tokyo and Shanghai.

However, before he left, he sized up Santos. He was an impressive, man. He, like many of the cannery workers, came from the Philippines. He had been with the organization less than a year and started as a low level laborer gutting and cleaning fish. He uncharacteristically quickly moved up the ranks through the union hierarchy. In a system based on seniority, his rise was due not just to hard work. He had a forceful and intimidating personality that made him stand out as first among peers. A dispute with a co-worker reinforced this. In what was acknowledged as self-defense, he shot and killed his opponent in plain site on the work floor. Further, he was an avid and expert card player. He usually played with other laborers, but one night he targeted management and professional outsiders that had come to take money from cannery workers in high stakes games. Santos carefully watched players all night to size up the competition. Play culminated around midnight in a game with thousands of dollars in the pot. With five players still in, Santos turned over a full house to win. Losers were upset, guns were drawn, and a re-deal was demanded. A tense standoff followed when the current cannery foreman was shot by one of the outsiders. Santos immediately fired at the assailant and killed him. He walked away from the table, leaving the money, and gives a menacing stare to the second in charge – the man who was heir-apparent take over the cannery. The next day, with the new foreman in charge, Santos was promoted off the fish floor. The new foreman was indebted to Santos – by leaving his winnings to the professional outsiders, the situation was de-escalated without further incident. In a month, Santos was promoted to assistant foreman. Santos’ forceful way of operating was effective and did not go un-noticed. Further, he proved himself to be an effective manager. Months later, he was appointed assistant foreman, and put in charge to put in place the new drug processing infrastructure.

Yamamoto was impressed. He informs Santos and the foreman that the cannery was being re-organized. Santos would now be in charge. And, the cannery was going to scale up the fish processing business through automation. Santos immediately put the old foreman in charge of the new cannery operations. He would run the drug side himself as well as the fishing operations, but the old foreman would report to him. Yamamoto nodded in approval. The old foreman had no choice but to accept his new role. It was a brilliant management move on Yamamoto’s part. He had found a natural leader that will be able to run the drug business as well as scale up the cannery.

He saw a little of himself in Santos.


Supply Problems in the East

With the re-organization completed, Yamamoto turned his attention to the real problem at hand – shoring up the supply side of the drug business. He needed to communicate with Toyama his concerns and that he was coming to Tokyo and Shanghai to rectify the situation. How would he do this?

The fishing fleet had state of the art radios. The radios (or a “relay” of communications through the radios) were capable of transmitting messages across the Pacific, thousands of miles away. Before he departed, he was able to communicate with Toyama his concerns – and that he was on his way to Tokyo. Rather, than traveling back to Seattle to catch a passenger boat, Yamamoto hopped a fishing boat back to Tokyo. While not as comfortable, the smaller boat was faster. Further, the trip from Anchorage was nearly one thousand miles closer than leaving from Seattle.
Toyama was happy to take a meeting with Yamamoto. Ironing out the supply problems surely would not be a problem he surmised. Of course, Toyama did not quite understand the issues nor was he interested. Having Yamamoto take care of the problems was a perfectly acceptable solution. But, more important, Toyama recognized the value of the opium business – much money flowed to the Black Dragon Society. Increased throughput and efficiency would only increase the money coming to him. The money was desperately needed to fund the diverse activities of the Black Dragon Society. Yamamoto was key actor in making the system work.

Toyama was prepared for Yamamoto. He had enlisted two trusted operators – one man, Yutani, in Tokyo and one, Natsuhara, in Shanghai. Both men were in Tokyo to meet Yamamoto. They would manage the relationship with the Green Gang. Yutani and Natsuhara were loyal to Black Dragon Society but had deep relationships with the Green Gang. Not surprising, all parties, -- Toyama, the two shadowy operators (Yutani and Natsuhara), the Green Gang, and Yamamoto -- were all committed to make this relationship work – there was too much money at stake. The men had a short meeting at the processing plant in Tokyo, toured the plant, and then visited the fishing and shipping operations. And the end of day, Yamamoto thought they were on their way to Shanghai. However, instead, they went to Toyama’s home in Tokyo. The home was actually an expansive compound. Once there, 2 members of the Green Gang met them. While Yamamoto had wanted to go to Shanghai to meet the Green Gang close to their operations, this would have to suffice. Introductions are made, and all seven men sat at a table. The Green Gang assured Yamamoto that all was now in order – the quantity, the quality, and predictability of deliveries would be improved. They then turned to Yutani and Natsuhara to discuss the logistical issues and operational changes needed. In the end, Yamamoto realized that getting into the details wasn’t going to help him. Instead, he assured them that he was confident in them and impressed upon them his commitment to and competence in his side of the operations. This meeting was about building relationships and trust. There was little he could do to help operationally, anyway. That said, he then made the decision to deploy trusted senior associates of the Toyo Club from Seattle to both Tokyo and Shanghai immediately. They would manage the relationships from the Toyo Club’s point of view and interests.

Over the day, Toyama had come to believe that Yamamoto believed his cause – his Nationalistic plan to make Japan great. He used the opportunity to reinforce his vision and explain the operational goals. He wouldn’t be clear and direct about his goals. Rather, through metaphor and obfuscation he’d clue Yamamoto into his plans to take his game to China and southeast Asia, his dealings with the Russians, his work with the Imperial Navy, and his influence and subversion within the Japanese government. No need to expose him to too many details. Rather, he wanted to indoctrinate him further, convince him of the cause, and get him to commit money to it. Finally, he had role for Yamamoto – to bring the cause to the United States. But that would wait.

It was a short trip. But Yamamoto had done all that he could. The meeting ended and Yamamoto then returned to Seattle, taking the long journey via passenger boat.

Almost immediately upon returning to Seattle, the Toyo Club saw an uptick in drugs from the East. It seemed problems in Tokyo and Shanghai were resolved and the shipping and processing operations were able to successfully handle to increased load.

Problems of Centralized Operations

With the upstream supply chain issues worked out, the downstream distribution system became the bottleneck to the operations. Centralization proved to be the problem Yamamoto feared. The large Chicago and Las Vegas distribution centers were big liabilities and operationally untenable. The warehouses were vulnerable to intruders and the feds. The sheer volume of drugs that would pass through the warehouses tempted too many people. Yamamoto, even with the help of Capone, could not secure these facilities. Ultimately, Yamamoto had no choice – the large warehouses were too vulnerable.

Instead, dozens of smaller distribution centers were constantly being created, used, and abandoned throughout the country. The smaller warehouses were organized in a “store and forward” network, where incoming shipments were received, sometimes repackaged as either small or larger loads, and then forwarded on other destinations. Capone’s organization would rendezvous at one of the small centers and take them forward to the Capone network. Because they were smaller than the large Chicago and Las Vegas centers, they were harder to detect, required smaller security infrastructure, and less expensive to operate. Securing these buildings from the fed, foes, and Capone’s organization remained an issue. Building these smaller, make-shift buildings quickly became a competency of the Toyo Club. They were able to build and bring online a new building in a matter of days.

Transportation loads were now smaller and an ad hoc fleet of cheaper, less secure automobiles was deployed. These vehicles were typically not equipped with any special protection or detection devices. Rather, they were smuggled in through the trunk and beneath the floorboard, protected only by guns and other weapons carried by the driver. San Luis Obispo and Seattle operations would need to figure out how to breakdown the large incoming shipments from the East (and Alaska) and distribute smaller quantities to the many distribution centers, instead of just shipping them off to the large warehouses in Chicago and Las Vegas. This increased the interactions with Capone’s organization at more touch points. It was a concern for both Yamamoto and Capone. But both realized it was necessary for the success of the arrangement.

Using smaller distribution centers instead two large warehouses solved the vulnerability problems of centralizing all shipments through two locations. However, it created new problems. In addition to the overhead of bringing up and tearing down distribution centers, coordinating with Capone’s organization became more difficult. It also introduced more concern because now the Toyo Club needed to interact with Capone’s organization at many touch-points, involving many people that were constantly changing. Locations needed their own security forces.

More vexing was figuring out the transportation logistics. Managing, scheduling, and routing small ships of drugs through the network was difficult, in fact intractably so. Yamamoto recognized that this was not a relationship problem as with the supply side. Instead, surprising to all including himself, he realized that this was a math problem. Really? A math problem? He visited the University of Washington to recruit a few mathematicians to solve it. It would be years before the disciplines of computer science and operations research would formalize these problems and find solutions. The Toyo Club applied some leading edge math research that would be recognized in the disciplines of operations research and computer science. Using math, the kinks in the distribution system were worked out. Drugs flowed through the network at near optimal efficiency.

The first ship of drugs through the network started off as small trickle, even after the supply side issues from the East were solved. The transition from the two large warehouses to the network of a dozen or so mini-warehouses initially slowed the flow. Within months, the Toyo Club was handling tens of thousands of dollars of heroin and opium a week, but this throughput plateaued and even declined as the logistics issues became more complicated, exponentially so. After Yamamoto applied the magic of mathematics to optimize the network, drug flow increased significantly. Within a year, it was handling $200,000/week. Ultimately, it was moving over one million dollars a week through the network.

Whatever happened to utilizing the public transportation network that was rapidly evolving and improving? In Yamamoto’s eye, this was a key to operational efficiency – leveraging a service provided by a third party whose competency was transportation. His business, after all, was drugs not transportation. The public network worked well for shipping drugs across the Pacific. However, overland distribution in the lower 48 never came on line. Yamamoto caught up in fixing the overseas bottleneck and transitioning to the distributed of network of distribution centers from the centralized warehouses were of higher priority. Decentralizing the warehouses created increased complexity not only on the Toyo Club’s internal network, but over the public network as well. It was an opportunity where he did not have the time to focus his attention. So Yamamoto only utilized his own transportation system, unable to leverage the increasingly improving public transportation system.

Retail Business

Of course, the Toyo Club also had a lucrative and growing retail opium and heroin business with its West Coast (and mostly Asian) clientele, in addition to its wholesale business. As it scaled up it’s wholesale business, it’s retail business also flourished. The margins on products because it bought in volume and controlled the supply chain improved significantly.

Yamamoto could not resist. The retail business was too lucrative. He wanted to push east into Capone territory. Using the existing wholesale network, he started to build a retail distribution network. While he had smartly negotiated to keep Capone out of the West, he believed he was free to move east. Not surprisingly, Capone did not think highly of this move. A bloody shootout at a warehouse in St. Louis brought this all to a head in 1929. Several men were killed on both sides. Realizing that he didn’t want to jeopardize the wholesale business with Capone, Yamamoto backed off. His goal to encroach on Capone’s retail business failed – but withdrawing was a prudent business move. “No risk, no reward,” Yamamoto shrugged when asked about.

The Business of Business

Yamamoto was known to be an uneducated nearly illiterate man. Much literature in retrospect describes him as a short stocky man, with a crooked broad nose. He walked like a simian, dragging his knuckles. Perhaps these descriptions were made because he was a hated man, feared by many, and, sometimes brutal and violent. In reality, as pictures show, he was quite the handsome man, sharply dressed, with an intimidating look that always said, “Don’t fuck with me, or I’ll kill you.”

Moreover for lack of an education, he had smarts – especially business smarts. This was clearly revealed in his building of the drug business for the Toyo Club. He was willing to take risks, somehow had the knowledge to start and scale the opium/heroin business, and experimented with business processes. His transformation from the central warehouses to the nimble distribution centers was an operational success story. His failure to enter the retail drug market east of the Rockies was a calculated risk that failed but ultimately didn’t hurt the business. Loss of men yes, but the wholesale business was protected. Maybe not surprising, a successful mobster was required to be a successful businessman.

End of a Decade

By late 1929, the opium and heroin businesses were operating in high gear. Millions of dollars a month flowed through the drug network that started in the poppy fields of China with also a little from Thailand, Laos and other parts of southeast Asia that ended up not only in the hands of users in the United States Asian communities but in the hands of Americans across the country. Money piled up in the coffers of the Toyo Club Syndicate but also in the hands of Toyama and of course the drug lords in China, especially the Green Gang.

During the last few years of the 1920’s, Yamamoto had focused on the Opium business but not to the extent that he ignored his role as Yokoyama’s right hand man. Indeed, he continued to be a value asset across the business units of the Toyo Club. His success had elevated his status, empowered the Toyo Club, and brought other clubs and operations in tighter control. It was the largest revenue source of the business, earning tens of millions of dollars.

It solidified his relationship with Yokoyama. Yokoyama was dependent on Yamamoto. However, this was obviously of concern to Yokoyama – too much power to a subordinate was an unstable power dynamic. Yamamoto did express his loyalty to Yokoyama as expected, but his own powerbase was undeniable. Was this threatening to Yokoyama? If so, how could Yokoyama “reel in” Yamamoto?

The business did take its toll on Yamamoto. First, opium addiction was rampant, ravaging not just the Japanese communities but America as a whole. Yamamoto, who was largely against drugs from a moral perspective, was dismayed by the societal impact. The retail business (not just the encroachment East) was messy and violent. The Toyo Club’s participation forced Yamamoto to see it first hand. And, unlike gambling and prostitution, opium was clearly on the illegal side of the law (even though that wasn’t always the case in the early 20th Century).

According to an FBI report:

For much of the past few years, Yamamoto, had long been suspected of illegal narcotic and smuggling. In cooperation with narcotic and customs inspectors, as well as a representative of the Tokyo police, they interrogated Yamamoto, and he boldly stated he found the United States so lax in law enforcement, he said he had found it necessary to have several Japanese killed for the best interests of the Japanese people on the western coast. He admitted he had been in the illegal narcotic business. Under pressure from the Federal Government, Yamamoto pleaded with the officials not to prosecute him, and promised, if any Japanese again became involved in the narcotic business, he would deliver the individuals to the proper authorities in a sack, and it would only be necessary to bury them.

It’s unclear what this all means – “necessary to have several Japanese killed?” Indeed it was a dirty business. But highly profitable. Thus, he would continue. However, at this point, Yamamoto contemplated, what was the point of all the money? And at what cost? He was despised by many for extorting businesses and the associated violence; but the bringing drugs into the community raised the hate to another level.

Was there are higher calling?

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