The Panama Canal, when constructed, was done with the permission of a government that had recently been established via a US-backed coup. The US established a treaty, or rather forced a treaty where the Panama Canal Zone would basically be US Government property. The US established a company that acted as the governing power of the zone, complete with a governor!

Part of the problem of the zone was that it was in the middle of the country, bisecting it. This can create quite a few problems, and it did. One of them was the sharp contrast of culture between the two areas. (Comparatively) rich American families of military personnel vs the impoverished Panamanians, many of which lived in Panama City, which sat adjacent to the canal zone.

With this friction building over the years, riots started becoming fairly common. One that gained the attention of mainland US was where a large group of American students went and took down the Panamanian flag flying over the canal zone. This erupted in a riot that resulted in 4 National Guardsmen killed and 22 Panamanian protesters. This day would become known as Martyr's Day in Panama. The president of Panama could not ignore this and sent an ultimatum saying that relations would no be renewed until the treaty was renegotiated.

The international community condemned America, even with Egypt's leader telling Panama to do like they had done with the Suez.

It was a mess that the US wanted out of.

President Johnson went into talks with the Panamanian President and though the intricacies of the discussion and concessions do escape me. The PCZ was put on a timetable to be returned to Panama in 1999.

http://adst.org/2016/07/panama-riots-1964-beginning-end-canal/

http://www.nytimes.com/1964/01/12/the-panama-canal-and-the-conflict-surrounding-it.html?mcubz=1 (Article from 1964!)

https://www.pri.org/stories/2014-01-10/50-years-ago-week-riots-determined-fate-panama-canal