It all started in 918, when four powerful magic users were thrown together. Each of them were old, older than most 'normal' witches and wizards and showed no signs of aging beyond the age of 30 or so. Caught by surprise, they were on the run, for the magical community of Scotland was being hunted down. Each had lost their homes and families and, despite their power, were relatively untrained and surviving off sheer luck alone. Their families had all been powerful and none had ever been required to fight. The Lady Slytherin and Lady Gryffindor were taught subterfuge, but no practical training had ever been offered and Lord Ravenclaw had always been a scholar. Only Lord Hufflepuff had had any training, but he had been sheltered by his family and never had to use his skills.
Once they met, they quickly decided to stick together for survival and Hufflepuff quickly taught his fellows how to fight. Eventually, the four of them became true warriors, and combined their skills to survive. Each of them had their specialties, with Gryffindor being best at battle magics, both defensive and offensive, Slytherin being especially proficient at disguise magics, and Hufflepuff knowing which plants were safe to eat. Ravenclaw, having spent lifetimes studying maps and the stars, was able to make sure that the four of them kept away from certain locations that they knew were dangerous and his knowledge of languages came in handy when they needed information.
Eventually, they managed to find a location that was relatively untouched by the wars and was isolated enough that they would not have to worry about many interactions with others, because it was surrounded by a forest that was termed cursed by the locals. They settled into the small mountain settlement and began to use the forest to practice magic again. Their personalities were all very different and what they each hoped to gain from this alliance was rarely in line with what the others wanted, but they each had skills that the others did not possess. For a while, the four of them were happy to remain there on their own, with little contact with the outside world. However soon, they became restless, and missed the life they had previously led. They had no desire to return to the society of Scotland, despite having settled there, for Scotland was too unstable and had failed to protect them, and so they went to speak to the monarchs of England.
King Alfred was hesitant but saw the benefits of having these four powerful magic users in his court and welcomed them. They became embroiled in the society of those that they termed "mundane." For some, the lack of aging now proved to be an inconvenience, such as Lord Hufflepuff, who was forced to remove himself from court every so often, so no one got suspicious that he never aged. For others, it was a mixed blessing, for while Ladies Gryffindor and Slytherin faced the same issues, they would always have a place in high society as young ladies, rather than married or widowed matrons. And for Lord Ravenclaw, who rarely involved himself in the world of court, it was merely a curiosity to be researched.
Despite involvement at court, they decided to remain living near their mountain settlement, which was far enough away that they could sufficiently withdraw, but close enough that it would not be difficult for them to return once it was safe to. The other courtiers changed often enough that there was rarely any reason for them to be away from court for long. The ruling family knew of their dilemma and gifted them for their service to England by building a castle near the settlement along a design that Ravenclaw created.
Once the castle was fully built, Hufflepuff was in charge of defending the ladies while they warded the full lands they had been gifted. Slytherin was placed in charge of disguising the location, and Gryffindor was in charge of defending the castle and surrounding areas. Together, Slytherin and Gryffindor created intensive wards, much more intensive than had ever been seen previously. During this time, they also made a point to visit the goblins, which Lord Ravenclaw's family had had dealings with, and acquire weapons.
In Scotland, the mark of the head of magical households had been a goblin forged weapon, passed down from older heads of house, to symbolize the role of protector of the family. While the four of them did not have their ancestor's weapons, they decided to honor this tradition. Slytherin had a beautiful pair of daggers made, which were enchanted to be unnoticeable while in their sheaths, and even still lay nearly flat when strapped to her forearms. Ravenclaw decided upon a spear which had protections from arrows or other projectiles built in, Hufflepuff had a war hammer made, in the image of the one that he had seen his head of family wield only once, with enchantments to make it lighter to hold, but not to deal less damage. Finally, Gryffindor chose a one-handed sword that was only enchanted to return to her if ever lost, for she preferred to rely upon her magic as much as upon her sword and any other enchantments might interfere with her casting abilities.
Soon word got around within the magical community of this castle and the 4 magic users were seen as protectors of those who had magic. They had only grown more powerful in their isolation, once they had time to truly perfect their magic, outside of the desperation of battle. Soon enough, each of the Lords and Ladies had their own magical staff and the town was flourishing.
The castle began to function as a magical court, with the society of magical Britain centered there. The main difference was the power women held, since both Gryffindor and Slytherin were as powerful as the men. It was also quite common that wizarding families were matrilineal, and while these families had an official male head of house for participation in the mundane court, this wasn't necessary at Hogwarts. In this way, the society of wizards was first differentiated from that of mundane society.
Many of the wizarding families had nearly been wiped out, making the court a haven for those who had no one left. While there was a higher society within the wizarding world, it mainly relied on how strong your magic was, so those who had been better educated by their family were seen as being better than those who had been born into a non-magical family, or even those who had not been trained at all for fear of persecution.
It was then that Hufflepuff suggested a magical school. Each of them had amassed a small following of magic users who were strong in their particular strength, but there were so few educated witches and wizards left that it was worth taking a few under their wing to tutor. The others agreed, although they did not wish to take too many under their wings. In this way, the tutoring of young magicals began.