In 1903 the United States secured the right, by treaty, to build a canal across Panama (see The 1903 Treaty and Qualified Independence , ch. 1). The United States rejected plans to build a sea-level canal similar to that attempted by the French and opted instead for a system based on locks. Construction began in 1907 and was facilitated by medical work that largely eradicated yellow fever and reduced the incidence of malaria (see Building the Canal , ch. 1).

Construction of the canal involved damming the Río Chagres to create the huge Gatun Lake in the middle of the isthmus. Channels were dug from each coast, and locks were built to raise and lower ships between sea level and Gatun Lake. Three sets of locks were constructed: Gatun Locks on the Atlantic side, and the Pedro Miguel and Miraflores Locks on the Pacific side. The lock chambers were 303 meters long by 33 meters wide, which limited vessel size to approximately 287 meters in length and 32 meters in width. Distance through the canal is eighty-two kilometers, and in 1987 transit took about fifteen hours, nearly half of which was spent in waiting. The canal began commercial operations in 1914.

The United States operated the canal and set tolls from the beginning of operation. Tolls covered operation costs but were kept low to encourage canal use. Direct benefits to Panama were minimal, consisting of annual annuity payments that increased infrequently, usually in response to Panamanian demands. In the 1975 to 1977 period, the annuity payments reached US$2.3 million a year. Indirect benefits to Panama's economy were substantial, however, and included the jobs of its citizens working in the Canal Zone, value of goods and services sold to the Canal Zone and to passing ships, and expenditures by visitors.

Data as of December 1987