Bailey was born in Devizes, Wiltshire, and raised from age 10 onwards on a farm in Nangeenan, Western Australia, without formal education.

After he grew interested in the lettering on tea-chests from India, he acquired a book of Bible selections translated into languages with non-European scripts, including Tamil, Arabic, and Japanese.

In 1927, after completing his master's degree on Euripides, he won a Hackett Studentship to Oxford where he joined the Delegacy of Non-Collegiate Students, later St Catherine's College.

[2] After graduating with first class honours in 1929, Bailey was appointed as Parsee Community Lecturer in the then London School of Oriental Studies.

In 1929 Bailey began his doctoral dissertation, a translation with notes of the Greater Bundahishn, a compendium of Zoroastrian writings in Middle Persian recorded in the Pahlavi scripts.