Positive or negative, reviewers agreed that the State of the Union address heralded a shift in focus regarding domestic affairs. Events in Panama, however, presented President Johnson with the first foreign policy crisis of his presidency. On January 7, Canal Zone students raised a U.S. flag in front of Balboa High School, violating an informal U.S.-Panamanian agreement that the flags of neither country would be flown outside schools. School officials removed the flag within an hour. When students responded by hoisting a second flag, the Canal Zone governor ordered officials not to interfere. The next two days, students raised and lowered U.S. flags at both Balboa and Cristobal High Schools, as well as at two elementary schools, prompting a complaint from the civic council in the Panamanian city of Balboa. When the governor still took no action, Panamanian students attempted to remove the flag themselves. Skirmishes broke out, and turned into riots that left 20 Panamanians and four Americans dead after U.S. troops moved in to restore the peace. Panama’s foreign minister, Galileo Solis, denounced the response as "ruthless aggression" against a "defenseless civilian population."

The outburst testified to the sensitive state of U.S.-Panamanian relations. Riots in the Zone also had occurred in 1959, forcing the State Department to concede "titular sovereignty" to Panama over the area. The action only generated criticism from both sides: Panamanian nationalists denounced it as an empty gesture, while conservatives in the U.S. Congress pushed through an appropriations rider forbidding the use of Canal Zone funds for displaying the Panamanian flag. The flag issue simmered until June of 1962, when Kennedy and Panamanian President Roberto Chiari agreed that representatives of the two nations should arrange for flying the flags of both nations at "appropriate places" in the Zone. Fifteen sites ultimately were selected: schools were explicitly excluded.

The flag issue symbolized the more general Panamanian desire to revise the Panama Canal Treaties, imposed upon the country in 1903 and last renegotiated in 1936. Kennedy made clear that the United States would not consent to such a demand, but, in the last six months of 1963, the two sides did open talks on what McGeorge Bundy described as "lesser measures," such as a $3 million grant proposal to Panama, a liberalization of the commercial clauses of the 1936 treaty, and the transfer of some land from the Zone to allow for the expansion of the Panamanian city of Colón.

These negotiations dragged along inconclusively in part because U.S. ambassador Joseph Farland submitted his resignation on July 18. A holdover from the Eisenhower administration, Farland departed after the State Department refused his demand that he receive another ambassadorial assignment. He also entertained political aspirations in his native West Virginia. Kennedy kept the post open throughout the fall in the expectation that he would offer it to Frank Coffin, a former U.S. representative from Maine who had lost a bid for governor of the Pine Tree State in 1960. Coffin had moved from the House to a position with AID but had feuded with David Bell. After Kennedy’s death, however, both President Johnson and Thomas Mann decided that they did not want to place Coffin in Panama, and so the post remained open. Columnists Evans and Novak termed Coffin a "New Frontier casualty." In fact, the President himself had chosen to veto the appointment: Johnson remembered a personal slight committed in 1961, when Coffin had told the then-Vice President, "You’re wrong," during a public dispute over the fate of that year’s AID bill.

That decision made a crisis in Panama more than unusually threatening to Johnson politically, since it allowed Republicans to charge that the President had allowed his personal pettiness to get in the way of the country’s national security interests. Richard Nixon, an unannounced candidate for the GOP presidential nomination, certainly thought so: he termed the crisis a symbol of "a general sickness in our Latin American policy," and promised to return to the issue—though, of course, "not in a political way"— more comprehensively in future addresses. The crisis also threatened to aggravate the President’s already cold relationship with Robert Kennedy. In sharp contrast to his predecessor, Johnson completely ignored the attorney general, who termed the "very badly" handled issue "the worst matter involving an international problem that I have not been in."

As events developed, the President's most important adviser was Georgia senator Richard Russell. Although Johnson’s elevation to the presidency had changed the balance of power between the two men, Russell retained enormous influence over the new President, especially in the early stages of the Johnson administration. The tapes of his early months in the White House clearly revealed Johnson’s lack of confidence on international matters, prompting him to turn for counsel to McGeorge Bundy, Robert McNamara, and Dean Rusk. But to Russell the President accorded respect both for his national security experience and his knowledge of congressional sentiment. In this instance, the President’s reliance on Russell had profound, and ultimately unfortunate, consequences. As the calls for today's class  illustrated, the Georgia senator pushed an extremely hard line toward the crisis that combined a thinly veiled racism with an exaggerated concern about communist influence in the Panamanian unrest. Russell would only grow more determined to avoid concessions to the Panamanians over the coming weeks.