Construction of the canal began on January 1, 1881, though digging at Culebra did not begin until January 22, 1881. A huge labor force was assembled; in 1888, this numbered about 40,000 men, nine-tenths of these being afro-Caribbean workers from the West Indies. French engineers were well paid and the prestige of the project attracted the best of France's engineering schools, but the huge death toll from disease made it difficult to retain them – they either left after short service, or died. The total death toll between 1881 and 1889 was estimated at over 22,000, of which as many of 5000 were French citizens.
Even as early as 1885, it had become clear to many that a sea-level canal was impractical, and that an elevated canal with locks was the best answer; however, de Lesseps was stubborn, and it was not until October 1887 that the lock canal plan was adopted.
By this time, however, the mounting financial, engineering and mortality problems, coupled with frequent floods and mudslides, were making it clear that the project was in serious trouble. Work was pushed forward under the new plan until May 15, 1889, when the company became bankrupt and work was finally suspended. After eight years, the work was about two-fifths completed, and some $234,795,000 had been spent.
The collapse of the company was a major scandal in France, and the role of two Jewish speculators in the affair enabled Edouard Drumont, an anti-semite, to exploit the matter. 104 legislators were found to have been involved in the corruption and Jean Jaurès was commissioned by the French parliament to conduct an inquiry into the matter, completed in 1893.
The work that had been done to this point was unimpressive in terms of actual construction, but in terms of preparation, essential. By the time Goethals took over, all of the infrastructure for the construction had been created, or at least greatly overhauled and expanded from the original French effort, which eased his task considerably; and he was soon able to start making real progress with the construction effort. He divided the project into three divisions: Atlantic, Central and Pacific.
The Atlantic division, under Major William L. Sibert, was responsible for construction of the massive breakwater at the entrance to Limon Bay, the Gatun locks and their 5.6 km approach channel, and the immense Gatun Dam.
The Pacific Division, under Sydney B. Williamson (the only civilian member of this high-level team), was similarly responsible for the Pacific entrance to the canal, including a 4.8 km breakwater in Panama Bay, the approach channel, and the Miraflores and Pedro Miguel locks and their associated dams.
The Central division, under Major David du Bose Gaillard, was responsible for everything in between; in particular, it had arguably the greatest challenge of the whole project – the excavation of the Culebra Cut (called Gaillard Cut 1915–2000), one of the greatest engineering tasks of its time, which involved cutting 8 miles (13 km) through the continental divide down to a level 12 meters (40 ft) above sea level.
By August 1907, 765,000 m³ per month was being excavated, which was a record for the difficult rainy season; not long after, this was doubled, and then increased again; at the peak of productivity, 2,300,000 m³ were being excavated per month (in terms of pure excavation, this is equivalent to digging a Channel Tunnel every 3½ months). Never in the history of construction work had so much material been removed so quickly.