In 1875, France, encouraged by the triumphant completion of the Suez Canal under the direction of De Lesseps, again became ambitious to pierce the Isthmus of Panama. A Promotion Company was formed for the purpose of drawing up a Panama Canal scheme, and obtaining from the Colombian Government the necessary grant of land, and all such privileges as might seem necessary to a successful carrying out of the enterprise in view. After lengthy negotiations, an agreement was concluded whereby this company received numerous concessions, such as the grant of a zone of land and the exclusive right to construct a canal across the Isthmus, on condition that, onwards from a given date, Colombia should be entitled to a fixed share of the income derived from the canal, that the general route of the canal should be determined by an international commission, and that the canal should always be a neutral right of way so that in case of war merchant vessels and passenger boats could pass through unmolested.

An international commission, known as the International Scientific Congress, met at Paris on May 15, 1879, under the presidency of Count de Lesseps. As a result of discussions that extended over a fortnight, the Conference came to the conclusion that a sea-level canal should be constructed from Limon Bay to the Bay of Panama.

The Promotion Company then transferred its rights and privileges to the Panama Canal Company, which was chartered under the laws of France. De Lesseps was given control of the new company. One of his first acts was to purchase enough shares in the Panama Railroad Company to give his company the controlling interest in that corporation; this was a very shrewd move, seeing that it might be found necessary to take the Panama Canal across territory owned by the Railroad Company, and that the Canal Company would certainly benefit by being able to make a first claim on the services of the trains for the transport of machinery, materials, labourers and stores.

On December 30, 1879, De Lesseps, who was then seventy-seven years old, arrived at Colon as head of a surveying party that included the chief engineers of the Dutch canals and waterways, and several famous mining engineers and civil engineers. Colon gave De Lesseps and his distinguished assistants a right royal welcome. A reception committee, consisting of delegates from the State Assembly and leading citizens, was on the quay to meet the French steamer which brought the illustrious guests. On board, where preparations had been made to receive the reception committee, there was much speechifying, toasting and bandying of compliments, whilst the pick of Panamanian musicians played stirring tunes, and the crowd on the wharf-side found a hundred and one ways of giving vent to their enthusiasm. In the evening the town was illuminated, and a display of fireworks was given.

De Lesseps was at work early the next morning. He made an examination of the harbour, and sought local information as to the direction and force of the most boisterous winds in that part of the world; then on a carefully prepared chart he marked the location of a break-water and the probable entrance to the great Isthmian Canal. He and his party boarded the midday trans-Isthmian train. Panama City was in gala dress for the reception of the venerable hero of Suez, who was officially welcomed at the station of the republican capital in the name of the sovereign State of Panama, and escorted to the principal hotel by a military guard of honour.

On January 1, 1880, De Lesseps made an examination of the country in which would be situated the Pacific terminus of the canal route he had planned by the help of the records of previous surveys which had been supplied to the Paris Congress.

Within a few days he had definitely decided on the general line of route. Meanwhile he had won the complete confidence of the Panamanians by the force of his personality, and the convincing manner in which he gave very simple, explanatory solutions of the supreme difficulties which he took the greatest pains to emphasize. There were high mountains in his way—by the sinking of wells, which could be charged with explosives that would tear up large areas of rock at each discharge, they would be prepared for transit to the trains that would be waiting to clear them off his track. The River Chagres was in his way—true, it was easier to remove mountains than to alter the course of a river, but the engineering world had long ceased to regard the construction of dams and diversion channels as experiments in the science and art of changing Nature's designs.

On January 10, 1880, De Lesseps took a large party to the neighbourhood of Culebra, to witness a momentous event. A mine had been laid in the mountain side. The seven-year-old daughter of De Lesseps performed the ceremony of applying the electric spark whereby a mighty blast tore a huge mass of solid rock from its foundation, and heralded the beginning of the great work of making the Panama Canal.

De Lesseps toured the United States and Europe for the purpose of inducing people to invest in the Panama Canal Company. Owing to the attractive way in which he introduced the Franco-Panama scheme to the public, large numbers of people clamoured for shares, and France would have had no difficulty at that stage of the proceedings in obtaining twice as much money as she felt she needed to get from outside contributors.

The route of the Franco-Panama Canal began at Folks River, Cristobal-Colon, followed the valley of the Chagres to Bas Obispo, passed through the Culebra mountains, followed the valley of the Rio Grande to its mouth, and went two miles out to sea in Panama Bay.

By the end of three years, De Lesseps and his staff had collected a good deal of machinery and a three-thousand strong labour force on the scene of operations; also, the work of excavating had been begun. But by this time the labourers had considerably raised the original scale of wages and were demanding still better pay, and other unforeseen difficulties had cropped up to hamper the organizers.

By 1885 it was an open secret that the Company could not complete the Canal in the stipulated time or at the estimated cost, the newspapers were crying out against the reckless extravagance which was going on in the Canal Zone, and the public who had invested in the enterprise were getting nervous. So, when, in that year, De Lesseps applied for permission to raise more funds by means of a lottery, the French Government sent another eminent engineer to the Isthmus to report on the situation. This expert emphatically announced that the amount of excavation which had yet to be done to complete the proposed sea-level canal would, under the best of economical management, cost a great deal more money over and above the original estimate than the public, in their present attitude to the enterprise, would be likely to subscribe; he recommended that new plans should be got out for a canal with locks, which would not require any alteration in route.

De Lesseps very reluctantly consented to the change. But there was only a poor response to the appeal for further funds which the French Government made, although very attractive terms were offered to investors. By the end of 1888 the Company was obliged to go into liquidation, and early in 1889 the work on the Canal was suspended. An official investigation of accounts showed that nearly $235,000,000 ($1=4s. 2d.) had been expended. De Lesseps had estimated that the Canal could be completed for a little over half that amount.

In 1894 the "New Panama Canal Company" was formed in France, and Colombia extended the date limit by which the waterway must be finished. In 1901 this Company hinted at its willingness to transfer its assets to the United States, who had been making various inquiries with a view to obtaining sole control of any practicable route for the construction of a canal between the Atlantic and Pacific Oceans. A deal was carried through between the New Panama Canal Company and the United States in 1904, with the consent of Panama, which had now become a separate republic. The United States paid the French company the "bargain" price of $40,000,000 for about 65 5,000 acres of Isthmian land, all the excavating work that had been done, machinery, boats, buildings, maps, records, and the Panama railroad. A treaty was entered into between the United States and the Republic of Panama, whereby the former were granted, together with numerous other rights and privileges, the use, occupation and control in perpetuity of a ten-miles wide zone of territory, beginning three miles away from shore in the Caribbean Sea and extending across the Isthmus to a boundary three miles out in the Pacific, excluding the cities of Colon and Panama; in return, the United States guaranteed to maintain the independence of the Republic of Panama, paid over a lump sum of $10,000,000, and undertook to make an annual payment of $250,000 onwards from 1913.

From an international standpoint, the most important clause in the agreement between the United States and the Republic of Panama is one stipulating that the Canal shall be neutral in perpetuity. In the Hay-Pauncefote Treaty between the United States and Great Britain (1901), the neutrality condition, under which the objection by Great Britain to a canal constructed by the United States was withdrawn, runs as follows:

"The Canal shall be free and open to the vessels of commerce and of war of all nations on terms of entire equality, so that there shall be no discrimination against any such nation."