The history of Penang is closely related to the history of Kedah. Penang was previously part of the sultanate of Kedah until it became a British possession in 1786. It later gained independence as part of the Federation of Malaya in 1957.
16th century Portuguese traders from Goa, India sailing to the Far East in search of spices found a small island where they replenished their water supplies. They named it Pulo Pinaom. In the 17th century, Penang’s location at the northern entry to the Straits of Malacca provided a sheltered harbour for Chinese, Indian, Arabian and European ships during the monsoon months; this, in turn, inevitably made it fertile hunting ground for pirates.
Originally part of the Malay sultanate of Kedah, Penang was ceded to the British East India Company in 1786 by the Sultan of Kedah, in exchange for military protection from Siamese and Burmese armies who were threatening Kedah. On 11 August 1786, Captain Francis Light, known as the founder of Penang, hoisted the Union Jack thereby taking formal possession of Penang and renamed it Prince of Wales Island (name used until after 1867) in honour of the heir to the British throne. Penang was the first British possession in the Malay States and Southeast Asia.
The location of the island at the opening of the Straits of Malacca attracted the British East India Company to use the island as a natural harbour and anchorage for their trading ships, and as a naval base to counter growing French ambitions in the region. The settlement on the north-eastern tip of the island was named George Town after King George III of the United Kingdom.
In 1826, Penang, along with Malacca and Singapore, became part of the Straits Settlements under the British administration in India, later coming under direct British rule in 1867 as a Crown Colony. George Town became the capital of the Straits Settlements, but its status was soon supplanted by rapidly developing Singapore whose importance eclipsed Penang's.
Penang was rocked by the Penang Riots in 1867, which were nine days of heavy street fighting and bloodshed among the secret societies of Penang. The fighting spiraled out of control, until the British were able bring in reinforcements from Singapore. The two principal Chinese secret societies – the Cantonese-speaking Ghee Hin and the Hakka-speaking Hai San – quarreled over commercial interests, especially in the lucrative tin-mining industry. Today's Cannon Street was so named because of the hole made on the ground by a cannon ball fired into the area from Khoo Kongsi.
The opening of Suez Canal in 1869 greatly expanded British trade with the Far East. Colonial Penang prospered through exports of tin and rubber, which fed the Industrial Revolution in Britain. Penang's prosperity attracted people from far and wide, making Penang truly a melting pot of diverse cultures. Among the ethnic groups found in Penang were Malays, Acehnese, Arabs, Armenians, British, Burmese, Germans, Jews, Chinese, Gujeratis, Bengalis, Japanese, Punjabis, Sindhis, Tamils, Thais, Malayalees, Rawas, Javanese, Mandailings, Portuguese, Eurasians and others. Though many of them no longer impose a felt presence today, their memory lives on in place names such as Burma Road, Rangoon Road, Siam Road, Armenian Street, Acheen Street, Gottlieb Road, and Katz Street, and the Jewish Cemetery.