In the face of appalling losses from disease in the first Spanish settlements on the Caribbean, Pedrarias moved his base across the isthmus to the more salubrious Pacific coast, where he founded PanamA? City in 1519. The new settlement became the jumping-off point for further Spanish conquests north and south along the coast, and after the conquest of Peru in 1533 began to flourish as the transit point for the fabulous wealth of the Incas on its way to fill the coffers of the Spanish Crown. From PanamA? City, cargo was transported across the isthmus on mules along the paved Camino Real to the ports of Nombre de Dios and later Portobelo, on the Caribbean coast. A second route, the Camino de Cruces, was used to transport heavier cargo to the highest navigable point on the RA­o Chagres, where it was transferred to canoes that carried it downriver to the coast. Once a year huge trade fairs lasting several weeks were held at Portobelo, when the Spanish royal fleet arrived to collect the gold and silver that had accumulated in the treasure houses of PanamA? and to trade European goods that were then redistributed across the Americas. The vast wealth that flowed across the isthmus was quick to attract the attention of Spain's enemies, and despite ever heavier fortification the Caribbean coast was constantly harassed by English and other European pirates . In the most daring attack, the English Henry Morgan sailed up the RA­o Chagres and crossed the isthmus to sack PanamA? City in 1671.

Though the city was rebuilt behind defences so formidable that it was never taken again, the raiding of the Caribbean coast continued, until finally in 1746 Spain rerouted the treasure fleet around Cape Horn . With the route across the isthmus all but abandoned, PanamA? slipped into decline, and settlement of the interior began to increase. Despite fierce resistance from indigenous groups the rest of the isthmus had been progressively conquered in the decades following the foundation of PanamA? City. The forests of DariA©n and the Atlantic coast had been largely abandoned once the early colonial gold mines established there had been exhausted, and provided a refuge for unsubmissive tribes and bands of renegade slaves known as cimarrones , while the Pacific coastal plain west of PanamA? City was gradually settled by farmers. Trade remained the dominant economic activity - whereas in most of the Spanish Empire political power lay in the hands of large landowners, in PanamA? it was always held by the merchant class of PanamA? City.

In 1821 PanamA? declared its independence from Spain , but retained its name as a department of Gran Colombia, which, with the secession of Ecuador and Venezuela, quickly became simply Colombia . Almost immediately, though, conflicts emerged between the merchants of PanamA? City, eager to trade freely with the world, and the distant, protectionist governments in BogotA?, leading to numerous half-hearted and unsuccessful attempts at independence.

Meanwhile, traffic across the isthmus was once again increasing, and exploded with the discovery of gold in California in 1849. Travel from the US east coast to California via PanamA? - by boat, overland by foot, and then by boat again - was far less arduous than the overland trek across North America, and thousands of "Forty-niners" passed through on their way to the goldfields. In 1851 a US company began the construction of a railway across PanamA?. Carving a route through the inhospitable swamps and forests of the isthmus proved immensely difficult, and thousands of the mostly Chinese and West Indian migrant workers died in the process, but when the railway was completed in 1855, the PanamA? Railroad Company proved an instant financial success. PanamA?'s importance as an international thoroughfare increased further, but the railway also marked the beginning of foreign control over the means of transport across the isthmus. Within a year, the first US military intervention in PanamA? - "to protect the railroad"- had taken place.