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On April 1, 1946, the Malayan Union officially came into existence with Sir Edward Gent as its governor. The capital of the Union was Kuala Lumpur.

The idea of the Union was first expressed by the British on October 1945 (plans had been presented to the War Cabinet as early as May 1944) in the aftermath of the Second World War by the British Military Administration. Sir Harold MacMichael was assigned the task of gathering the Malay state rulers' approval for the Malayan Union in the same month. In a short period of time, he managed to obtain all the Malay rulers’ approval. The reasons for their agreement, despite the loss of political power that it entailed for the Malay rulers, has been much debated; the consensus appears to be that the main reasons were that as the Malay rulers were of course resident during the Japanese occupation, they were open to the accusation of collaboration, and that they were threatened with dethronement. Hence the approval was given, though it was with utmost reluctance.

The Malayan Union gave equal rights to people who wished to apply for citizenship. It was automatically granted to people who were born in any state in British Malaya or Singapore and were living there before 15 February 1942, born outside British Malaya or the Straits Settlements only if their fathers were citizens of the Malayan Union and those who reached 18 years old and who had lived in British Malaya or Singapore "10 out of 15 years before 15 February 1942". The group of people eligible for application of citizenship had to live in Singapore or British Malaya "for 5 out of 8 years preceding the application", had to be of good character, understand and speak the English or Malay language and "had to take an oath of allegiance to the Malayan Union".

The Sultans, the traditional rulers of the Malay states, conceded all their powers to the British Crown except in religious matters. The Malayan Union was placed under the jurisdiction of a British Governor, signalling the formal inauguration of British colonial rule in the Malay peninsula. Moreover, even though State Councils were still kept functioning in the former Federated Malay States, it lost the limited autonomy that they enjoyed as they administered some local and less important aspects of government and the Federal government in Kuala Lumpur controlling vital aspects. State Councils became an extended hand of the Federal government that had to do its bidding. Also, British Residents replacing the Sultans as the head of the State Councils meant that the political status of the Sultans were greatly reduced.