William Malcolm Hailey was born in 1872 at Newport Pagnell, a small town in north Buckinghamshire, the third son of Hammett Hailey, a country doctor who died when Malcolm was nine. His mother, Maria Coelia Clode, was from a family long established in the City of London, where her brother, John, had served as president of the Merchant Taylors’ Company. All three Hailey brothers attended the Merchant Taylors’ School. The eldest, Hammett (b. 1869), who was called by his initials, H.R.C., preceded Malcolm to Oxford and into the Indian Civil Service (ICS), serving in the land and revenue departments of the United Provinces (UP), where his more distinguished younger brother would one day retire as governor. Hammett's son, Peter, also joined the ICS. Malcolm's second brother, Rupert (b. 1870), was sent down after only four years at school and eventually became manager of a gold field in the northern Celebes. A younger sister, Violet, was the only one of Malcolm's siblings who survived him. Although they were late arrivals compared with the Stracheys or the Butlers, for instance, the Haileys were becoming an established Anglo-Indian family. Even the black sheep went overseas.

Merchant Taylors’, which Malcolm attended from 1883 to 1890, had been founded by the company of the same name in 1561 as a quasi-charitable institution. By the nineteenth century, however, the company had become vestigial and the school was supported by the Corporation of the City of London.