The recorded history of Bhutan prior to the 7th Century remains obscure. Only after the visit by a famous Buddhist saint, Guru Padmasambhava from India, that the history of Bhutan as a nation came to be known. After the arrival of Buddhism, during the seventh century, the various Buddhist schools began sharing the power in the country with the old aristocratic families. The cleric Shabdrung Ngawang Namgyel united the independent principalities into one state. After his death the theocracy disintegrated and the provincial lords fought to gain control over the central power.

Bhutan's early history is steeped in mythology and remains obscure. It may have been inhabited as early as 2000 B.C., but not much was known until the introduction of Tibetan Buddhism in the 9th century A.D. when turmoil in Tibet forced many monks to flee to Bhutan. In the 12th century A.D., the Drukpa Kagyupa School was established and remains the dominant form of Buddhism in Bhutan today. The country's political history is intimately tied to its religious history and the relations among the various monastic schools and monasteries.

The consolidation of Bhutan occurred in 1616 when Ngawana Namgyal, a lama from Tibet, defeated three Tibetan invasions, subjugated rival religious schools, codified an intricate and comprehensive system of law, and established himself as ruler (shabdrung) over a system of ecclesiastical and civil administrators. After his death, infighting and civil war eroded the power of the shabdrung for the next 200 years when in 1885, Ugyen Wangchuck was able to consolidate power and cultivated closer ties with the British in India.

In 1907, Ugyen Wangchuck was elected as the hereditary ruler of Bhutan, crowned on December 17, 1907, and installed as the head of state Druk Gyalpo (Dragon King). In 1910, King Ugyen and the British signed the Treaty of Punakha which provided that British India would not interfere in the internal affairs of Bhutan if the country accepted external advice in its external relations. When Ugyen Wangchuck died in 1926, his son Jigme Wangchuck became the next ruler, and when India gained independence in 1947, the new Indian Government recognized Bhutan as an independent country. In 1949, India and Bhutan signed the Treaty of Peace and Friendship, which provided that India would not interfere in Bhutan's internal affairs but would be guided by India in its foreign policy. Succeeded in 1952 by his son Jigme Dorji Wangchuck, Bhutan began to slowly emerge from its isolation and began a program of planned development. Bhutan became a member of the United Nations in 1971, and during his tenure the National Assembly was established and a new code of law, as well as the Royal Bhutanese Army and the High Court.

In 1972, the present king, Jigme Singye Wanchuck, ascended the throne at age 16. He has emphasized modern education, decentralization of governance, the development of hydroelectricity and tourism and improvements in rural developments. The current king has established an overarching development philosophy of "Gross National Happiness." It recognizes that there are many dimensions to development and that economic goals alone are not sufficient.

Traditionally a decentralized theocracy and, since 1907, a monarchy, Bhutan is evolving into a constitutional monarchy with a representative government. The establishment of the monarchy in 1907 brought peace again. His Majesty Jigme Singye Wangchuck, abdicated all of his powers as King to his son, Prince Jigme Khesar Namgyel Wangchuck, with a specific intention to prepare the young King for the country's transformation to a full-fledged, democratic form of government in 2008.