The Panama Canal was opened in 1914. It was an enormous undertaking. The canal took ten years to complete (from the time Teddy Roosevelt got our country’s work on the canal started), and $400 million (about $15 billion in today’s money).
For ships, the Panama Canal saved a trip around South America at Cape Horn; albeit at the cost of the toll charged by the canal. In its first year of operation, less than a thousand ships passed through the canal. By the 1960s, the number of ships passing through the canal had risen to about 14,000 per year. From the 1960s to 2023, the number of ships passing through the canal fluctuated about that number (14,000), while ship size increased enormously. In 2024, due to a water shortage, the number of ships passing through the canal fell to about 12,000.
Last year, not only did the number of ships passing through the canal fall, waiting times for ships “in the queue” (or, lined up outside the canal) increased. It should also be mentioned that tolls per ton have very much increased since the canal was turned over to Panama, and “transit fees” have been added.
Because of higher costs, waiting times and other problems, shipping companies are exploring alternatives such as routing ships around Cape Horn and transferring cargo to rail and pipeline to cross the Americas through Mexico. And, most recently, the management of the Panama Canal has become a political issue in the United States. The Trump administration expressed concern with the incorporation of the canal into China’s Belt & Road Initiative. Fortunately, Secretary of State Marco Rubio and Panamanian President José Raúl Mulino have resolved this matter, with Panama’s commitment to remove the canal from that initiative.
This series looks at the history and current issues concerning the Panama Canal. We begin with the technology of the lock canal.
The Technology of the Lock Canal
The Erie Canal overcomes the change in elevation from Buffalo at Lake Erie (590 feet above sea level) to Albany at the Hudson River (2 feet above sea level). Ignoring some intermediate changes in elevation, the canal descends 588 feet along its length.
Locks are used to convert the descent of a canal into so many discrete steps. At each step, there is a lock. The operation of the lock lowers ships from a higher level of one portion of the canal to the lower level of the next portion. Or, conversely, raises ships. In the case of lowering a ship:
A) The ship comes into the lock at the higher level. At this time, the doors of the lock to the higher level are open, and the doors of the lock to the lower level are closed.
B) Once the ship is in the lock, both sets of doors are closed, and water is discharged from the lock to the lower level. In this process, the level within the lock is lowered to that of the lower level.
C) When the level in the lock reaches the lower level of the canal, the doors of the lock at the lower level are opened, and the ship proceeds out of the lock.
It was Leonardo da Vinci who invented the lock canal. In particular, the “V” or mitre shape of the juncture of each of the two sets of doors of the lock allows the water pressure of uneven water levels to shut the doors tight. Conversely, the lack of pressure of equal water levels allows easy opening of the doors.
Da Vinci consulted with the French in their projection of a great canal (270 miles) from Bordeaux on the Atlantic Ocean to the Mediterranean Sea. The southern part (connecting with the Mediterranean) was completed in 1691, and the northern part (connecting with the Atlantic) was completed in 1838.
The Erie Canal was a bit longer (350 miles). It was particularly impressive as we were a developing country at the time of the construction of the Erie Canal (from 1817 to 1825).
A canal across the Isthmus of Panama, although much shorter than either the French Canal of the Two Seas or the Erie Canal, would be even more impressive.
Crossing the Isthmus
By 1849, the United States had secured California and Oregon (then including Washington state) on the Pacific Coast. Freight service between the east and west coasts of the country was conducted by ship around South America.
That year, the S.S. America, a steam-powered side-wheeler, departed the east coast and – while the ship was making its way around South America – word got back to the east coast that gold had been discovered in California. Hundreds of people hurriedly made their way to Panama, to cross the isthmus by old Indian trails, to intercept the side-wheeler at Panama City. When the ship arrived at San Francisco, everybody on board except the captain joined in the Gold Rush, crew as well as passengers. The ship was stranded in San Francisco for months before provisions and a new crew could be found.
The SS America
There had to be a better way.
In 1855 a better way came to fruition: a railroad at the Isthmus of Panama. The Gold Rush gave new impetus to a project to construct a railroad there. Even when it was under construction, 49ers paid to go as far as the railroad would take them, and completed their journey on foot. With the Gold Rush, additional shares of stock were sold to investors back in New York. Other funds were raised in London by an issue of bonds. In the end, completing the railroad required $8 million, and took the lives of some 5,000 workers, most due to malaria. With the completion of the railroad, travel from New York to California took something like 30 days, instead of 180.
The period from its completion until 1869 was a golden age for the Panama Railroad. During this time, the Panama Railroad effectively had a monopoly on “interoceanic” traffic. Although the railroad’s capital expenditure per mile of road and operating expenses were very high, its revenues were even higher. The interest obligations of its bonds were easily met, and dividends on its stock were regularly paid. Then, in 1869, came the first transcontinental railroad. The Panama Railroad lost its monopoly.
As the following chart shows, the price of stock in the Panama Railroad peaked at about 3.5 times par value just prior to the completion of the first transcontinental railroad. Price subsequently fell to about half of par value, and then recovered to a modest premium over par value. While the company had lost its monopoly, it continued to be profitable.
Starting in 1879, price started to rise on indications that the French were interested in acquiring the Panama Railroad pursuant to constructing a canal. In 1881, the Panama Railroad was sold to a company headed by Ferdinand de Lesseps for $250 per share. De Lesseps had headed up the French company that constructed the Suez Canal.
In 1881, the Panama Railroad was purchased by a French company headed by Ferdinand de Lesseps. The French company was mostly interested in the Panama Railroad because of its grant from Colombia to a right of way across the Isthmus of Panama.
Previously, from 1859 to 1869, de Lesseps had headed the French company that constructed the Suez Canal, a 78-mile sea-level canal connecting the Mediterranean Sea and the Red Sea (which, in turn, connects with the Indian Ocean). The new canal (the Panama Canal) would be much shorter and presumably less expensive. The estimated cost was, however, grossly underestimated.
Work got underway immediately. Tens of thousands of workers were assembled, along with lots of heavy equipment and scores of well-trained French engineers. The work, however, was impeded by jungles and very rugged mountainous terrain, by tropical diseases, and by raging rivers. Landslides were a constant problem. It became obvious that a sea-level canal was impractical and that the canal would have to be a lock-canal. By 1889, $287 million had been spent, 22,000 workers had died, and the canal was only two-fifths completed. Work was then suspended, and the company ended in bankruptcy and scandal.
At the time, the United States was interested in an alternate canal route, through Nicaragua. But, with the French project in shambles, the United States would reconsider its options if the French project could be purchased on reasonable terms and if an agreement could be obtained from Colombia.
Buying the French project was not a problem. $40 million was all it took to buy their mess. But, getting an agreement from Colombia proved to be impossible. The canal turned into a matter of national pride, and a proposed treaty with that country was rejected. So, the United States took a different approach.
At the time of independence, the enormous holdings of Spain in the New World were organized as three great viceroys, each the size of an empire: Colombia, Mexico and Peru. All three broke up during the century following independence. Breaking away from Colombia by the mid-nineteenth century were Venezuela and Ecuador, leaving only Panama still part of Colombia.
When Panama sought independence from Colombia during the time the United States became interested in completing the canal started by the French, the United States backed Panama. The United States paid the new country of Panama $10 million plus $250,000 per year for a perpetual lease. The United States also paid Colombia $25 million to accept Panama’s independence.
Money can be useful in getting things done.