To streamline the administration of the Malay states and especially to protect and further develop the lucrative trade in tin-mining and rubber, Britain sought to consolidate and centralise control by federating the four contiguous states of Selangor, Perak, Negeri Sembilan and Pahang into a new entity, the Federated Malay States (FMS), with Kuala Lumpur as its capital. The Residents-General administered the federation but compromised by allowing the Sultans to retain limited powers as the authority on Islam and Malay customs. Modern legislation was introduced with the creation of the Federal Council. Although the Sultans had less power than their counterparts in the Unfederated Malay States, the FMS enjoyed a much higher degree of modernisation. Federalisation also brought benefit through cooperative economic development, as evident in the earlier period, when Pahang was developed using funds from the revenue of Selangor and Perak.
The Unfederated Malay States, on the other hand, maintained their quasi-independence, had more autonomony and instead of having a Resident they were required only to accept a British Advisor, though in reality they were still bound by treaty to accept the advice. Economic exploitation by the British was much less as the emphasis was more on keeping these states in line. Perlis, Kedah, Kelantan and Terengganu were surrendered by Siam after the Anglo-Siamese Treaty of 1909. Independent Johor, meanwhile, had to surrender Singapore to the British earlier on and despite the Sultan's political effort was forced to accept an advisor in 1914, becoming the last Malay state to lose her sovereignty.
This period of slow consolidation of power into a centralised government and compromise (the Sultans retain their reign but not rule in their states) would have a great impact later on the road to nationhood. It effectively marked the transition of the idea of Malay states as a collective of lands governed by feudal rulers to a more Westminster-type federal constitutional monarchy. This was to become the acceptable model for the future Federation of Malaya and ultimately Malaysia, a government type unique in the region where other countries adopted a stricter, heavily centralised administration.
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