The history of Bhutan is linked to the rise of the Drukpa or “Dragon” school of Himalayan Buddhism, a cornerstone of Bhutanese cultural life to this day.
The name Bhutan is believed to have come from the Sanskrit Bhot (which means Tibet) and Anta (which means "at the end of"), a compound word that described the geographic location of Bhutan. Bhotanta was later anglicized to Bhutan.
The people of Bhutan themselves call the Kingdom Druk Yul, or "Land of the Thunder Dragon." The word Druk or "Dragon" alluded to the Drukpa or Dragon School of Buddhism whose teachers and masters established their influence over religious and cultural affairs in the kingdom.
The First King of Bhutan His Majesty Gongsar Ugyen Wangchuck (Front, third from right) with a British Officer, from the book The Raven Crown: The Origins of Buddhist Monarchy in Bhutan
Bhutanese history parallels Buddhism's spread in the Himalayas and to properly understand the history of the kingdom, one also needs to understand the overarching influence of Buddhism in the region.
A degree of mystery shrouds Bhutan's distant past as multiple fires in temples, monasteries and archives down the centuries destroyed many significant records. A very strong predominance of the oral tradition of recounting historical events further complicates the matter.
A great number of the the oral accounts as well as scholarly and liturgical texts point to the fact that Padmasambhava, known in the Himalayas as a second, though no-less-significant, Buddha arrived on the back of a "flying Tigress" in 747 AD. His legendary odyssey across the Himalayas left an indelible mark on the culture, practices and sensibilities of the people in the Himalayan sphere. As such he is revered as the principal founder of the Nyingmapa religious school of Buddhism. Many of Bhutan's most celebrated historical figures descended from the Nyingmapa School, including the forbears of the present royal family of Bhutan. Pema Lingpa, the best known among the later Nyingmapa saints died in Bumthang in Central Bhutan in 1521. He was believed to be a "heart-son" or lineage holder of Guru Padmasambhava's teachings and founded monasteries and temples at Petsheling, Kunzangdrak and Tamshing in Central Bhutan, institutions that are still active today.
More than a century later Shabdrung Ngawang Namgyel, from the Drukpa School of Tibetan Buddhism, came to Bhutan and designed the current dual system of government which entertwines religious and secular government. When he arrived in the kingdom in 1616 no central religious authority existed and regional conflict had troubled the kingdom for centuries. In his quest to unify the country, the Shabdrung, as he is known, gained the support of many powerful families and built a series of Dzongs (fortress-monasteries), which are still the cornerstones of religious life and secular administration in the kingdom to today. He eventually became the first secular and religious leader in Bhutan.
The document with the seals of the regional governors of Bhutan, electing His Majesty Gongsar Ugyen Wangchuck as the First Hereditary Ruler of Bhutan. From the book The Raven Crown: The Origins of Buddhist Monarchy in Bhutan
In the following two centuries after the Shabdrung's death civil war broke out frequently and the regional Penlops or governors became powerful figures. At the close of the 19th century, the Penlop of Trongsa in Central Bhutan gained the trust and confidence of most of the country, following an internal struggle for power. Soon he was recognized by all the regional governors and lords as a unifying figure who could bring back peace and stability in the kingdom. This was His Majesty Gongsar Ugyen Wangchuck, who was crowned the First Druk Gyalpo (or Dragon King) of Bhutan in 1907. The monarchy has thrived since then and the Fourth King of Bhutan, His Majesty Jigme Singye Wangchuck, ushered in an era of unprecedented prosperity and development for the Bhutanese people based on his idea of Gross National Happiness. His son, currently the Fifth King of Bhutan, introduced a parliamentary system of democracy along with his father, fulfilling an ambitious legacy of handing power to the people through a democratic government led by a Prime Minister elected every five years.
This is just a quick over view of the complex history of Bhutan. For a comprehensive and well-researched book on the subject read The History of Bhutan by (Dr.) Karma Phuntsho.