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Sir Ugyen Wangchuck's emergence as the national leader coincided with the realization that the dual political system was obsolete and ineffective removed his chief rival, the Ponlop (Governor) of Paro, and installed a supporter and relative, a member of the pro-British Dorji family in his place. When the last Zhabdrung died in 1903 and a reincarnation had not appeared by 1906, civil administration came under the control of Sir Ugyen Wangchuck. In 1907, the 54th and last Druk Desi was forced to retire, and despite recognitions of subsequent reincarnations of Ngawang Namgyal, the Zhabdrung system came to an end.

In November 1907, an assembly of leading Buddhist monks, government officials, and heads of important families was held to end the moribund 300-year-old dual system of government and established a new absolute monarchy. Ugyen Wangchuck was elected as the first hereditary Druk Gyalpo (Dragon King, who reigned 1907-26). The Dorji family became hereditary holders of the position of Gongzim (Chief Chamberlain), the top government post. The British, wanting political stability on their northern frontier, assented to the entire development.

A new Bhutanese-British Treaty of Punakha was signed on January 8, 1910. It amended two articles of the 1865 Treaty: the British agreed to double their annual stipend to 100,000 rupees and "to exercise no interference in the internal administration of Bhutan." However, Bhutan agreed to be guided by the British Government in regard to its external relations. The Treaty of Punakha also guaranteed Bhutan's defense against China.

Much of Bhutan's modern development has been attributed by Bhutanese historians to the first Druk Gyalpo. Internal reforms included introducing Western-style schools, improving internal communications, encouraging trade and commerce with India, and revitalizing the Buddhist monastic system. Ugyen Wangchuck was concerned about the continuity of the family dynasty, and in 1924 he sought British assurance that the Wangchuck family would retain its preeminent position in Bhutan. His request led to an investigation of the legal status of Bhutan vis-a-vis the suzerainty held over Bhutan by Britain and the ambiguity of Bhutan's relationship to India. Both the suzerainty and the ambiguity were maintained.