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Following his first year at Columbia, in 1941 Colby volunteered for active duty with the United States Army and served with the Office of Strategic Services (OSS) as a "Jedburgh", or special operator, trained to work with resistance forces in occupied Europe to harass German and Axis forces. During World War II, he parachuted behind enemy lines twice and earned the Silver Star as well as commendations from Norway, France, and Great Britain. In his first mission he deployed to France as a Jedburgh commanding Team BRUCE, in mid-August 1944, and operated with the Maquis until he joined up with Allied forces later that fall. In April 1945, he led the NORSO Group Operasjon Rype into Norway on a sabotage mission to destroy railway lines, in an effort to hinder German forces in Norway from reinforcing the final defense of Germany.
After the war, Colby graduated from Columbia Law School and then briefly practiced law in William J. Donovan's New York firm, Donovan, Leisure, Newton & Irvine. Bored by the practice of law and inspired by his liberal beliefs, he moved to Washington to work for the National Labor Relations Board.
Then an OSS friend offered him a job at the Central Intelligence Agency (CIA), and Colby accepted. Colby spent the next 12 years in the field, first in Stockholm, Sweden. There, he helped set up the stay-behind networks of Operation Gladio, a covert paramilitary organization organized by the CIA to make any Soviet occupation more difficult, as he later described in his memoirs.
Colby then spent much of the 1950s based in Rome, under cover as a State Department officer, where he led the Agency's covert political operations campaign to support anti-Communist parties in their electoral contests against left wing, Soviet Union–associated parties. The Christian Democrats and allied parties won several key elections in the 1950s, preventing a takeover by the Communist Party. Colby was a vocal advocate within the CIA and the United States government for engaging the non-Communist left wing parties in order to create broader non-Communist coalitions capable of governing fractious Italy; this position first brought him into conflict with James J. Angleton.
In 1959 Colby became the CIA's deputy chief and then chief of station in Saigon, South Vietnam, where he served until 1962. Tasked by CIA with supporting the government of Ngô Đình Diệm, Colby established a relationship with President Diem's family and with Ngô Đình Nhu, the president's brother, with whom Colby became close. While in Vietnam, Colby focused intensively on building up Vietnamese capabilities to combat the Viet Cong insurgency in the countryside. He argued that "the key to the war in Vietnam was the war in the villages." In 1962 he returned to Washington to become the deputy and then chief of CIA's Far East Division, succeeding Desmond Fitzgerald, who had been tapped to lead the Agency's efforts against Fidel Castro's Cuba. During these years Colby was deeply involved in Washington's policies in East Asia, particularly with respect to Vietnam, as well as Indonesia, Japan, Korea, and China. He was deeply critical of the decision to abandon support for Diem, and he believed this played a material part in the weakening of the South Vietnamese position in the years following.
In 1968, while Colby was preparing to take up the post of chief of the Soviet Bloc Division of the Agency, President Lyndon Johnson instead sent Colby back to Vietnam as deputy to Robert Komer, who had been charged with streamlining the civilian side of the American and South Vietnamese efforts against the Communists. Shortly after arriving Colby succeeded Komer as head of the U.S./South Vietnamese rural pacification effort named CORDS. Part of the effort was the controversial Phoenix Program, an initiative designed to identify and attack the "Viet Cong Infrastructure." There is considerable debate about the merits of the program, which was subject to allegations that it relied on or was complicit in assassination and torture. Colby, however, consistently insisted that such tactics were not authorized by or permitted in the program.
More broadly, along with Ambassador Ellsworth Bunker and Military Assistance Command, Vietnam (MACV) commander General Creighton Abrams, Colby was part of a leadership group that worked to apply a new approach to the war designed to focus more on pacification (winning hearts and minds) and securing the countryside as opposed to the "search and destroy" approach that had characterized General William Westmoreland's tenure as MACV commander. Some, including Colby later in life, argue that this approach succeeded in reducing the Communist insurgency in South Vietnam, but that South Vietnam, without air and ground support by the United States after the 1973 Paris Peace Accords, was ultimately overwhelmed by a conventional North Vietnamese assault in 1975. The CORDS model and its approach influenced U.S. strategy and thinking on counterinsurgency in the 2000s in Iraq and Afghanistan.
Colby returned to Washington in July 1971 and became executive director of CIA. After long-time DCI Richard Helms was dismissed by President Nixon in 1973, James Schlesinger assumed the helm at the Agency. A strong believer in reform of the CIA and the intelligence community more broadly, Schlesinger had written a 1971 Bureau of the Budget report outlining his views on the subject. Colby, who had had a somewhat unorthodox career in the CIA focused on political action and counterinsurgency, agreed with Schlesinger's reformist approach. Schlesinger appointed him head of the clandestine branch in early 1973. When Nixon reshuffled his agency heads and made Schlesinger secretary of defense, Colby emerged as a natural candidate for DCI—apparently on the basis of the recommendation that he was a professional who would not make waves. Colby was known as a media-friendly CIA director. His tenure as DCI, which lasted two and a half tumultuous years, was overshadowed by the Church and Pike congressional investigations into alleged U.S. intelligence malfeasance over the preceding 25 years, including 1975, the so-called Year of Intelligence.
Colby's time as DCI was also eventful on the world stage. Shortly after he assumed leadership, the Yom Kippur War broke out, an event that surprised not only the American intelligence agencies but also the Israelis. This intelligence surprise reportedly affected Colby's credibility with the Nixon administration. Colby participated in the National Security Council meetings that responded to apparent Soviet intentions to intervene in the war by raising the alert level of U.S. forces to DEFCON 3 and defusing the crisis. In 1975, after many years of involvement, South Vietnam fell to Communist forces in April 1975, a particularly difficult blow for Colby, who had dedicated so much of his life and career to the American effort there. Events in the arms-control field, Angola, Australia, the Middle East, and elsewhere also demanded attention.
Colby also focused on internal reforms within the CIA and the intelligence community. He attempted to modernize what he believed to be some out-of-date structures and practices by disbanding the Board of National Estimates and replacing it with the National Intelligence Council. In a speech from 1973 addressed to NSA employees he emphasised the role of free speech in USA and moral role of CIA as defender, not preventer of civil rights, an attempt to rebut the then emerging revelations of CIA and NSA domestic spying. He also mentioned a number of reforms intended to limit excessive classification of governmental information.
President Ford, advised by Henry Kissinger and others concerned by Colby's controversial openness to Congress and distance from the White House, replaced Colby late in 1975 with George H. W. Bush during the so-called Halloween Massacre in which Secretary of Defense Schlesinger was also replaced (by Donald Rumsfeld). Colby was offered the position of United States Permanent Representative to NATO but turned it down.
In 1977 Colby founded a D.C. law firm—Colby, Miller & Hanes, with Marshall Miller, David Hanes, and associated lawyers, and worked on public policy issues. In consonance with his long-held liberal views, Colby became a supporter of the nuclear freeze and of reductions in military spending. He practiced law and advised various bodies on intelligence matters.
During this period he also wrote two books, both of which were memoirs of his professional life combined with discussions of history and policy. One was titled Honorable Men: My Life in the CIA; the other, on Vietnam and his long involvement with American policy there, was called Lost Victory. In the latter book, Colby argued that the U.S.–RVN counterinsurgency campaign in Vietnam had succeeded by the early 1970s and that South Vietnam could have survived had the U.S. continued to provide support after the Paris Accords. Though the topic remains open and controversial, some recent scholarship, including by Lewis "Bob" Sorley, supports Colby's arguments.
Colby also lent his expertise and knowledge, along with Oleg Kalugin, to the Activision game Spycraft: The Great Game, which was released shortly before his death. Both Colby and Kalugin played themselves in the game.
William E. Colby was a member of the National Coalition to Ban Handguns. His name appears on a note to Senator John Heinz dated July 5, 1989 as a "National Sponsor".