The flag of Panama was made by Maria Ossa de Amador. It has been officially adopted by the "ley 48 de 1925"; the flag is celebrated on November 4, one day after Panamanian independence from Colombia.
The first flag proposed in 1823 consisted of 7 horizontal stripes of red and yellow, with a blue canton containing 2 golden suns, joined by a narrow line to depict the oceans to be united by the Panama Canal (see the depiction below). However, this was not accepted by the Panamanian leader, Manuel Amador Guerrero, whose family designed a new flag.
The stars and quarters are said to stand for the rival political parties, and the white for the peace in which they operate. Blue was the color of the Conservatives, and red the color of the Liberals. 
The Frenchman Philippe-Jean Bunau-Varilla designed the first serious proposal for a Panamanian flag.
Bunau-Varilla's design is based on the Flag of the United States, possibly on account of that country's hand in Panamanian independence. Retaining the thirteen stripes, he changed the white stripes to yellow, emphasizing the Panamanian connection to Colombia and Spain (whose flags both prominently feature red and yellow). Varilla replaced the stars in the blue canton with two interconnected yellow suns; the suns represent North and South America, and are connected because of Panama's position connecting the two continents. 
Bunau-Varilla's proposal was rejected by the Panamanian revolutionary council on the grounds that it was designed by a foreigner.
Maria Ossa de Amador Proposal
The current Panamanian flag was made by Maria Ossa de Amador on November 1, 1903. The son of Manuel Amador Guerrero, generally recognized as a skillful drawer, sketched the flag and showed it to Maria Ossa de Amador, who, after much difficulty in avoiding the Colombian army, eventually produced three copies of the flag, which were all eventually flown in Panama City upon independence, and distributed widely.
The Panamanian government officially described the flag in Law 15 of December 1949, as follows: The Flag of the Republic consists thus of a divided rectangle of four quarters: the upper field close to the pole white with a blue star of five points; the upper field further from the pole, red; the lower field near the pole, blue; and the lower one further from the pole, white with a red star of five points.
This flag was to reflect the political situation of the time. The blue was intended to represent the Conservative Party and the red to represent the Liberal Party. The white was intended to stand for peace and purity; the blue star stands for the purity and honesty of the life of the country; the red star represents the authority and law in the country; and together the stars stand for the new republic.
- Gaceta Oficial No. 4601 25 March 1925 (http://www.asamblea.gob.pa/APPS/LEGISPAN/PDF_NORMAS/1920/1925/1925_097_0722.PDF)
- (Flags of the World, published DK Publishing, 1997)
- Mellander, Gustavo A. (1971) The United States in Panamanian Politics: The Intriguing Formative Years Danville, Ill.: Interstate Publishers, OCLC 138568
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