It's a classic urban legend of drug culture: A terrorist group/the CIA/the Yippies/the mob is planning to spike a city's water supply with LSD to cause mass hysteria. In two recent articles, Fortean Times traced the rumors back to the 1950s when the CIA first became interested in the potential of LSD as a mind-control drug. From FT:
The psychedelic water saga arose at the height of the Cold War in 1953, when the intelligence agency approached Dr Nick Bercel, a Los Angeles psychiatrist working with LSD in a psychotheraÂpeutic context. After querying him on the possible consequences if the Russians were to put LSD in the water supply of a large American city, the spooks demanded Bercel calculate how much LSD would be needed to dose Los Angeles’s water supply with acid.
Bercel dissolved some LSD in a glass of chlorinated water, which promptly neutralised the psychedelic, leading him to tell the CIA the idea was not worth pursuing. The spooks were unconvinced, allegedly designing another versÂion of LSD that was not neutralised by chlorÂine. Yet although the experiment had failed, the idea that LSD could be used to mass-dose the population had been created – and even though scientific opinion was against it, the notion was just too powerful to give up and started to take on a life of its own.
Following up on that article about the urban legend, Fortean Times has posted a new feature taking a much deeper dip into the CIA's obsession with mass dosing. Basically, they didn't take the first no as an answer. From Fortean Times:
Dr Jim Ketchum was involved in the US Army’s programme for testing the military effectiveness of a whole range of psychedelic chemicals. He entered his office as Department Chief one Monday morning in 1969 and found a black steel barrel, a bit like an oil drum, in the corner.  The military does not always explain everything, and Dr Ketchum assumed there was a good reason for this unusual addition to the furniture. However, after a couple of days he became curious. He waited until everyone else in the building had gone home one evening and opened the lid.
The barrel was filled with sealed glass canisters “like cookie jars”. He took one out to inspect it; the label indicated that the jar contained three pounds of pure EA 1729. This wouldn’t mean much to most people, but to anyone working in this field the code was instantly familiar. Substances were given EA designations from the Army’s Edgewood Arsenal; EA 1729 is the military designation for LSD. The other glass canisters were the same, perhaps 14 of them in all. This was enough acid for several hundred million doses with, Ketchum estimated, a street value of over a billion dollars.
Some wild ideas about what to do next flitted through his mind, but in the event he simply sealed the barrel up again. By the Friday morning it had vanished as mysteriously as it arrived.