A Global History of Banking

By David Zu

“I had fulfilled my mission. The mission I had taken on myself.
I had safeguarded the work of French genius. I had served France.”

Philippe-Jean Bunau-Varilla,
Panama Canal: The Eighth Wonder of the World

Introduction: The Key to Global Transport

How do you transport hundreds of millions of tons of cargo, carrying essential goods like food, clothing, and technology, across the world every year? While many would say boats is the obvious answer, there is a second, equally important component: canals.

Completed in 1914, the Panama Canal (Figure 1), alongside the Suez Canal, is one of the most strategically important artificial waterways in the world. The canal spans approximately 65 kilometres from Colón on the Atlantic side to Balboa, near the Bay of Panama, on the Pacific side (Figure 2). Passage through the canal allows shipping vessels to save anywhere from 3,700 to 15,000 kilometres in voyage distance, depending on the source and destination (Gordon 2026).

From only around 800 transits in 1916 to over 11,200 in 2024 (Figure 3), the significance of the Panama Canal for global trade has grown exponentially. Today, over 200 million tons of cargo are carried through the canal every year (Gordon 2026). But this wasn’t always the case.

How did an undeveloped Central American isthmus undergo one of the most ambitious engineering projects of the nineteenth century to transform into a global shipping powerhouse today? How did the Panama Canal Company squander investors’ money throughout the canal’s construction, turning the affair into one of the largest corruption scandals in modern French history? And how do the failures of speculation and corruption translate into lessons in the modern financial world?

The History of Panama, and the Canal

Panama, a country located at the southern end of Central America, forms an isthmus connecting North and South America. The country was first inhabited by a plurality of Indigenous tribes, before the arrival of Spanish colonists in 1538 who would rule the country for almost 300 years. After declaring independence from a weakening Spanish imperial empire, Panama voluntarily joined its neighbouring country Colombia as a subdivision of Gran Colombia in 1821 (Gordon 2026).

The first attempt to build a canal across Panama began in 1881, after the Colombian government granted a concession to French diplomat Fredinand de Lesseps’ privately owned Compagnie Universelle du Canal Interocéanique (Degos and Hauret 2008). De Lesseps, coming off of recent success in building the Suez Canal, which yielded a fivefold return for investors, became confident in his ability to repeat his triumph in Panama (Figure 7). Appealing to his track record, he was able to attract significant public support and draw in 53 million francs (approximately 37 billion CAD today) from various small investors (Wheeler 1895).

De Lesseps’ plan was to build a sea-level canal, but Adolphe Godin de Lépinay, an engineer who had studied the isthmus, strongly protested this approach in 1879, instead recommending a more feasible plan to build a lock-based canal. His plan involved creating artificial lakes by damming the lakes Gatún and Miraflores so that water could rise and create “locks” that could control the flow of water in the canal (Gordon 2026) (Figure 4).

Unfortunately, Lépinay’s plan was ignored, and De Lesseps’ construction began. However, unlike his previous experience in the Suez, Panama’s geography and climate was vastly different. While Suez consisted of arid desert, Panama was a tropical jungle with extreme rain, heat, and humidity, as well as a host of tropical diseases (Degos and Hauret 2008). Moreover, the topography of the proposal canal route varied significantly, consisting of coastal marshes and mountains, slowing down digging. Progress was slow and workers died frequently due to disease (Gordon 2026).

Despite the struggles, de Lessep remained obstinate in the project’s success, using his widespread influence to blame his adversaries for the Panama Canal Company’s financial misfortunes. To make matters worse, there was widespread corruption. Out of the 53 million francs raised, only around 31 million were spent on construction and payments to contractors, with the rest being spent lavishly on houses and accommodation for the staff and directors of the Company. Even more was spent in direct bribery, to buy the favour of the press and banks through commissions (Wheeler 1895).

Government investigations ultimately uncovered this embezzlement, and in 1893 a prosecution for breach of trust was issued against de Lesseps, his son, and other members of the Company; he and his son were sentenced to five years’ prison each (Wheeler 1895).

Meanwhile, the French public finally lost trust in the Panama Canal Company and pulled their funding, and the company collapsed in 1889. Eventually, half of the French excavation would be used in the later U.S. canal construction, but investors lost all their investments in the project (Degos and Hauret 2008).

Why did the French Canal Construction Fail?

What led to de Lesseps’ failed endeavour? His overconfidence led him to overlook the challenges of construction, having conducted an imperfect survey, whose data overestimated his success. His delusion led him to promise investors that the geography was more favourable than that of Suez, despite the contrary (Brown 2010).

Moreover, his inadequate knowledge of logistical difficulties, like the geography and topography of Panama, alongside a lack of accountability and oversight into his company’s operations led to widespread corruption that wasted funds. Despite little progress, De Lesseps would also constantly promise more to the public, using his past credit and his reputation to convince investors and the public that success was imminent (Wheeler 1895).

Deliberate bribery by the company further exacerbated this illusion of profit, with money being paid off to the media to run positive stories, while banks underwriting bonds issued to fund the project were being paid handsome commissions to stay silent about impending failures (Brown 2010) (Figure 5).

Essentially, the financial dishonesty and incompetent canal construction, and adverse incentives from the banking sector abetted by corruption, led to mass speculation from French investors, buttressing a project that was doomed to fail.

What Came Next?

Members of the public who lost their savings in investments or bonds issued by the Panama Canal Company were understandably enraged. Multiple waves of public backlash followed, with broad criticism levelled against the French government, politicians, and parliament, who individuals considered broadly responsible for enabling de Lesseps’ speculative project. Beyond the public trials and prosecution of prominent elites, it can be argued that the social protest spurred the development of France’s anarchist movement, leading to social revolt and riots (Mollier 2020).

Meanwhile, a new actor emerged: the United States. In 1902, the American Congress passed the Spooner Act, allowing them to purchase the assets of the French company on the condition Colombia agreed to negotiations. When those negotiations broke down, the U.S. backed Panama’s declaration of independence and Frenchman Philippe-Jean Bunau-Varilla would eventually sell the right to canal construction to the United States in 1903 under the Hay-Bunau-Varilla Treaty. The canal was eventually completed and opened to traffic in 1914 (Gordon 2026).

The Panama Canal Scandal and its Lessons for Today

The dangers of speculation, a lack of due diligence, and excessive trust in authority still resonate in the twenty-first century. During the 2008 financial crisis, a speculative boom in housing led to an explosion in risky lending of mortgages, which were bundled into complex financial products that created the illusion of diversification and safety. Furthermore, loosening lending standards and social pressure to purchase a house created public overconfidence that pushed even ordinary Americans to invest in mortgage-backed securities (Weinberg 2013).

Banks also had adverse incentives to promote these securities such that more loans could be issued, and brokers could earn more commissions, regardless of the security quality. Eventually, when the housing bubble popped, major financial firms failed and had to be bailed out by the government, costing billions in taxpayer dollars. Ordinary people lost their jobs, their savings, their homes, and were plunged into a years-long recession that affected the entire world (Weinberg 2013).

Similar to the Panama Canal Company crisis, this could have been averted with greater transparency measures. In the wake of 2008, governments imposed higher capital requirements for banks to reduce the risk of bank runs, liquidity rules to reduce risky funding structures, and stricter oversight for systemic risk (such as the Dodd-Frank Act) (Weinberg 2013).

There are also significant parallels between corrupt institutions exploiting the public then and now, as seen by the rise of populist leaders promising great economic prosperity to their people based on faulty policies. The corporate lobbying that persists in the banking sector, among other industries like medicine and fossil fuels, have allowed politicians to continually benefit from bribes and embezzlement while costing the average citizen.

De Lesseps’ failed utopian vision of constructing a grand Panama Canal reminds us that in our own hubris, we can sometimes fly too close to the sun – and with enough unchecked power and influence, bring others down with ruinous financial and social consequences.

Discussion Questions

1. Institutions played a large role selling the promise of de Lesseps’ Panama Canal. How could those institutions have held the Company accountable rather than bailing out its failures?
2. Was de Lépinay a visionary whose alternative plan for building the Canal could have succeeded? Or would he have been just as vulnerable to the risks of financial speculation?
3. What do you think were the factors that allowed the United States to succeed in the canal construction where the French failed?

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References:

Brown, Frederick. 2010. For the Soul of France : Culture Wars in the Age of Dreyfus. With Internet Archive. New York : Alfred A. Knopf. http://archive.org/details/forsouloffrancec0000brow.

Degos, Jean-Guy, and Christian Prat dit Hauret. 2008. “L’échec du canal de Panama :Des grandes espérances à la détresse financière.” Économie. Revue française de gestion 188189 (8): 307–24. https://doi.org/10.3166/rfg.188-189.307-324.

Gordon, Burton L. 2026. “Panama Canal – Locks, Shipping, History | Britannica.” March 12. https://www.britannica.com/topic/Panama-Canal.

Mollier, Jean-Yves. 2020. “Retour sur le scandale de Panama.” Entreprises et histoire 101 (4): 14–26. https://doi.org/10.3917/eh.101.0014.

Weinberg, John. 2013. “The Great Recession and Its Aftermath.” November 22. https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath.

Wheeler, W. H. 1895. “Ferdinand de Lesseps and the Suez and Panama Canals.” Longman’s Magazine,  1882-1905 (London, United Kingdom) 25 (148): 394–411.