At the stroke of noon on December 31, 1999, the Panamanian flag was raised over the Panama Canal, signaling the final transfer of the 51-mile, man-made waterway from the United States to Panama. The ceremony brought an end to nearly a century of strained relations and violent protest over America’s ownership and management of a key economic resource in the heart of Latin America.
The low point in U.S.-Panamanian relations came in 1964 when clashes began in the U.S.-controlled Panama Canal Zone over the flying of a Panama flag alongside a U.S. flag at a local high school. The country erupted in widespread riots, 22 Panamanians were killed by U.S. troops and Panama cut off diplomatic relations with America.
Over the next decade, starting with Lyndon Johnson, several American administrations tried to negotiate a deal for ceding the canal to Panama. But it was Jimmy Carter in 1977 who overcame political opposition to sign the treaties ending the American operation of the Panama Canal in 1999.
Ultimately, the decision to hand the canal back to Panama was both political and economic, says Noel Maurer, professor of international affairs and international business at the George Washington University School of Business.
“Economically, the Panama Canal was extremely important for the United States before World War II, but after that its economic importance declined rapidly,” says Maurer, author of The Big Ditch: How America Took, Built, Ran, and Ultimately Gave Away the Panama Canal. “And by the time Jimmy Carter decided to take the political risk of giving it back, its economic importance to the United States was almost nothing.”
US Backs Panama's Independence in Exchange for Canal
When Teddy Roosevelt signed the Hay–Bunau-Varilla Treaty in 1903, the country of Panama was just 15 days old. The isthmus had been ruled by Colombia, but the Colombian government was reeling from a bloody civil war. The Roosevelt administration saw an opportunity. The Americans promised to support a Panamanian bid for independence in exchange for the rights to construct the Panama Canal and operate it within a sovereign, U.S.-run Canal Zone.
The Panama Canal was completed in 1914, an engineering marvel of locks that raise ships 85 feet above sea level as they sail from the Caribbean Sea to the Pacific Ocean.
But from the start, there was dissatisfaction within Panama and across Latin America with the U.S. government controlling such an economically valuable resource. The idea of digging a shortcut across the Isthmus of Panama was first proposed in the 16th century, and the route became a well-worn path for river and overland shipments long before the Americans built their canal.
“I think it's important to remember that this canal connects two oceans in a place that's been connecting oceans with different technologies for 500 years,” says historian Marixa Lasso. “So that's why Panamanians are so attached and say this is our land; this is our route.”
Canal Zone Created
According to the 1903 treaty that created the 51-mile-long, 10-mile-wide Canal Zone, the United States retained “all the rights, power and authority within the zone” for perpetuity. The United States didn’t “own” the Canal Zone, but it had the authority to govern, operate and protect the zone as if it were “sovereign” territory within Panama.
To create the Canal Zone, the United States removed an estimated 62,000 Panamanians living in more than 40 towns and villages in the region.
“If you read the U.S. reports from the time, they claim there was nothing there but jungle,” says Lasso, author of Erased: The Untold Story of the Panama Canal. “But that wasn't true. It was a place filled with towns and people who had managed the Panama route for 400 years by then.”
After the canal was built, the Canal Zone became a government-run “company town” with housing, schools and businesses exclusively for American citizens. The Canal Zone was racially segregated until 1954, with Black and white workers given separate “gold” and “silver” jobs. Their families attended segregated schools and used separate bathrooms and recreation facilities.
“The Canal Zone was not a normal place,” says Maurer. “It was essentially run like a giant military base, but also like a socialist enterprise. Everything was operated by the U.S. government, even franchises like McDonald’s.”
The American residents of the Canal Zone were known as “Zonians.” Families worked and lived in the zone for generations, and many Zonians developed a distrust and even antipathy toward Panamanians, who weren’t allowed to enter the Canal Zone unless they worked there. For the average Panamanian, the bad feelings were mutual.
“The basic conflict was that Panama was really angry that first we built a canal and we created the Canal Zone, but then we did everything we could to ensure that Panama got absolutely no economic benefit from the canal whatsoever,” says Maurer.
Deadly Fights Over the Flag
In the 1950s, the Panamanian government brought a long list of complaints to the Eisenhower administration: Panamanian workers were being paid less for the same canal jobs; foreign goods were being imported and sold in the Canal Zone in ways that hurt the Panamanian economy; and the American military presence in the Canal Zone often felt like a police state.
But the unifying symbol of all of Panama’s dissatisfaction with American control of the canal became the flag—specifically the exclusive display of the American flag in the Canal Zone.
In 1959, there were anti-American riots in Panama City over America’s refusal to fly the Panamanian flag in the Canal Zone. The Eisenhower administration responded with a plan to improve economic conditions in Panama, and it also designated a single location within the Canal Zone where the American and Panamanian flags would be flown side-by-side.
In 1963, John F. Kennedy went further and signed an executive order stating that both the American and Panamanian flags should be flown at all non-military sites in the Canal Zone, including schools. But many Zonians defied the order, including the students at Balboa High School in the Canal Zone.
On January 9, 1964, a contingent of Panamanian students marched to the border of the Canal Zone carrying a Panamanian flag. They demanded that Balboa High School raise it alongside the American flag, but the Zonians trampled and tore the flag instead. A skirmish ensued, but no one was seriously hurt.
Hours later, news spread about the flag incident and the real trouble began. Panamanians threw rocks at the American Embassy. American office buildings and stores were looted and burned. The U.S. military was dispatched to quell the riot. During three days of clashes, 22 Panamanians were killed and hundreds more were injured. Roberto Chiari, Panama’s president, responded by severing diplomatic ties with the United States, the first and only time a Latin American country has taken that measure.
Long Road to a Treaty
Maurer says that American presidents started talking about ceding the Panama Canal to Panama as early as the Truman administration. After World War II, it was clear that the economic benefits of the canal were drying up, at least for the United States.
For Americans, the Panama Canal paid its biggest economic dividends in the 1920s and 1930s, when it was used to transport oil and lumber from the West Coast to refineries and factories on the East Coast. But by the 1940s, railroads had switched to diesel engines, and it was cheaper and faster to transport by rail than by sea.
Also, America’s experience in World War II proved that the Panama Canal wasn’t as strategically important as once thought. The canal wasn’t used for any major military operations, plus it was highly vulnerable to acts of sabotage that could cripple the waterway with little effort.
Cold War anxieties kept the prospect of returning the canal to Panama off the table, though, especially after the Cuban Revolution of 1959. With Communist Cuba so close, ceding ownership of the canal to Panama ran the risk of handing it to the Soviets.
The political situation changed after the 1964 riots. Starting with the Johnson administration, each successive U.S. president wrestled with the right course to take in the Panama Canal. Maurer says that Gerald Ford, a conservative Republican, was surprisingly willing to part with the canal, but for his own reasons.
“Ford hated the Zonians,” says Maurer. “It’s amazing to read some of Gerald Ford's internal anger at the people living in the Canal Zone. He saw them as self-satisfied socialists sitting there sucking at the government teat in the most un-American way. To Ford, America had created this little enclave that represented everything that we’re not supposed to be.”
Carter Returns the Canal to Panama
When Jimmy Carter took office in 1977, negotiations with Panama had been ongoing for nearly a decade. But with Republican opposition softening, Carter and his advisors saw a path to a treaty.
By this point, there was little to gain from the United States holding onto the canal, either politically or economically, says Maurer. The Soviets cited U.S. control of the canal as an example of American “imperialism.” Also, the country benefiting the most from the canal in the 1970s was Japan, which used it to ship inexpensive cars and electronics that undercut U.S. companies.
In 1977, Carter signed two treaties with Panama that created a framework for handing over the canal. First, the Neutrality Treaty gave the U.S. military the right to defend the Panama Canal if there is ever a threat to its “neutrality.” Second, the Panama Canal Treaty stated that the Canal Zone would officially be dissolved on October 1, 1979, and that the canal itself would be turned over to Panama on December 31, 1999.
“It was an enormous time of celebration in Panama,” says Lasso. “Not only the signing, which was very important, but also in 1979 when Panamanians could finally enter the Canal Zone freely. It was also a big moment for all of Latin America because it was seen as the end of the last colony in Latin America.”
From 1979 to 1999, both American and Panamanian flags flew at all civilian and military outposts while the two countries worked together to assure a smooth transition.
“When the administration of the canal switched from American to Panamanian, it wasn't a sudden change,” says Lasso. “It was designed to be a very slow, careful process. That ensured that the Panama Canal would continue to function without any problems like it has for the past 25 years.”
