On 16 September 1963, Singapore merged with the Federation of Malaya alongside Sabah and Sarawak to form Malaysia. This marked the end of a 144-year period of British rule in Singapore, beginning from the founding of modern Singapore by Sir Stamford Raffles in 1819.

The union, however, was rocky from the start. Distrust and ideological differences between leaders of the State of Singapore and the federal government of Malaysia resulted in frequent disagreement in politics, economic, financial and social policies. The conflict spread to the populace, resulting in major racial riots in 1964 in Singapore. In 1965, Malaysia Prime Minister Tunku Abdul Rahman decided upon the secession of Singapore from the Federation, leading to the Independence of Singapore on 9 August 1965.

Malaysia

A national ceremony at [[City Hall, Singapore celebrates the formation of the Federation of Malaysia|left|thumb|250px]]

The merger with Malaysia was thought to be the solution to resolve unemployment, a stagnating economy and the security threats posed by revolutionary elements in the period. This would be done by forming a new nation, eliminating trade taxes and therefore allowing a common, free market to open up, solving economic and unemployment woes. London approved the merger, convinced that Singapore's security would be safeguarded by the much larger Malaysia. Thus on September 16, 1963, Malaya, Singapore, Sabah and Sarawak were formally merged and Malaysia was formed. In Singapore, the 1963 state elections were held on 21 September, just five days after the merger. The local branch of UMNO took part in Singapore's election as part of the Singapore Alliance Party, but they lost all their bids. This included three electoral districts with a Malay majority which they had held previously. The People's Action Party (PAP) was re-elected as the majority party in the Legislative Assembly.

Racial tension

Racial tensions increased dramatically within a year and were fueled by Barisan Sosialis's tactics of stirring up communal sentiment as the pro-communist party sought to use desperate means to survive against the crackdown by both the government of Singapore and the Federal Government. In particular, the Chinese in Singapore disdained being discriminated against by Federal policies of affirmative action, which granted special privileges to the Malays guaranteed under Article 153 of the Constitution of Malaysia. There were also other financial and economic benefits that were preferentially given to Malays. Islam was the sole official religion, although non-Muslims maintained the freedom of worship.

Meanwhile, the Malays and Muslims in Singapore were being increasingly incited by the federal government's accusations that the PAP was mistreating the Malays. Numerous racial riots resulted, and curfews were frequently imposed to restore order. The external political situation was also tense at the time, with Indonesia actively against the establishment of the Federation of Malaysia. President Sukarno of Indonesia declared a state of Konfrontasi (Confrontation) against Malaysia and initiated military and other actions against the new nation, including the bombing of MacDonald House in March 1965 by Indonesian commandos which killed three people. Indonesia also conducted sedition activities to provoke the Malays against the Chinese.
thumb|left|350px|The start of the racial riot on Muhammad's birthday that killed 23 people and would injure hundreds more.
One of the more notorious riots was the 1964 Race Riots that took place on Prophet Muhammad's birthday on July 21, near Kallang Gasworks with twenty-three killed and hundreds injured as Chinese and Malays attacked each other. More riots broke out in September 1964. The price of food heavily skyrocketed when the transport system was disrupted during this period of unrest, causing further hardship. The Government later introduced the Racial Harmony Day, which falls on the same date as the riots.

Disagreement

The federal government of Malaysia, dominated by the United Malays National Organization, feared that as long as Singapore remained in the Federation, the bumiputra policy of positive racial discrimination to the Malays would be undermined and therefore not in the interest of their pro-Malay agenda. One of the major causes of this fear was the fact that the PAP continued to repeatedly cry for a "Malaysian Malaysia!" - the fair and equal treatment of all races in Malaysia, by serving Malaysian citizens, rather than the Malay race. Another contributor was the fear that the economic dominance of Singapore's port would inevitably shift political power away from Kuala Lumpur in time, should Singapore remain in the federation.

The state and federal governments also had disagreement on the economic front. Despite earlier agreement to establish a common market, Singapore continued to face restrictions when trading with the rest of Malaysia. In retaliation, Singapore did not extend to Sabah and Sarawak the full extent of the loans agreed to for economic development of the two eastern states. The situation escalated to such intensity that talks soon broke down and abusive speeches and writings became rife on both sides. UMNO extremists called for the arrest of Lee Kuan Yew.

Separation

On August 7, 1965, Prime Minister Tunku Abdul Rahman, seeing no alternative to avoid further bloodshed, advised the Parliament of Malaysia that it should vote to expel Singapore from Malaysia. Despite last ditch attempts by PAP leaders, including Lee Kuan Yew, to keep Singapore as a state in the union, the Parliament on August 9, 1965 voted 126-0 in favour of the expulsion of Singapore, with members of Parliament from Singapore not present. On that day, a tearful Lee Kuan Yew announced that Singapore was a sovereign, independent nation and assumed the role of prime minister of the new nation. His speech included this quote: "For me, it is a moment of anguish. All my life, my whole adult life, I have believed in merger and unity of the two territories." Hence, Singapore became the only country in the history of the modern world to gain independence against its own will.

Under constitutional amendments passed in December of that year, the new state became the Republic of Singapore, with the Yang di-Pertuan Negara becoming President, and the Legislative Assembly becoming the Parliament of Singapore. These changes were made retroactive to the date of Singapore's secession from Malaysia. The Malaya and British Borneo Dollar remained legal tender until the introduction of the Singapore dollar in 1967. Before the currency split, there was discussions about a common currency between the Malay and Singaporean Governments.