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Rishi Valley was born with the idea of starting a world university, conceptualised by Annie Besant, President of the Theosophical Society, in 1925. Three possible sites were identified near Jiddu Krishnamurti's birthplace and he chose the Thettu Valley because of the Big Banyan Tree, which implied the concentration of water and thus the possible sustenance of an institution. The Thettu region was of no importance historically, geographically (it has a history of failed monsoons and famines were usual occurrences) or economically; the only reason it was even considered was because Krishnamurti was born in Madanapalle, a nearby village.

His colleague, C.S. Trilokikar bought the land—accumulating 300 acres where the campus lies. Starting in 1926 Trilokikar traveled around atop a bullock cart buying up small parcels of land bit by bit.[3] Before the land was completely assembled, Besant abandoned the idea of a world university because there were more pressing matters of national importance such as India's Home-Rule Movement. Trilokikar named the whole basin Rishi Valley, a name derived from legends about rishiswho were rumoured to live in the hills surrounding the valley thousands of years ago.

By this time, the Guindy School, based in Madras, started by Besant in 1918, was already well recognised before its principal, G.V. Subba Rao (GVS), decided to relocate the entire school to the area purchased by Trilokikar. Space in the Guindy School was limited, the neighbourhood was noisy and crowded and each year the torrential Northeast Monsoon would cause havoc, destroying the school's thatched roofs and blowing down its cottages. After a particularly bad cyclone in 1930, Krishnamurti met GVS, and it was decided that Guindy be relocated to Rishi Valley. The building of the initial structures was undertaken by the Theosophists who were drawn to Krishnamurti's teachings. Many engineers were brought in to oversee construction work on campus, all of whom refused to accept pay. By September 1931, the initial structures were ready to accommodate the school. Shortly after this, Subba Rao relocated to their new campus with approximately ninety students and teachers. Just as the moving was completed, an unprecedented 50 inches of rainfall graced Rishi Valley's parched landscape and the area was inundated with water. The inhabitants of the surrounding villages thought the coming of the school was a blessing and a sign of prosperity. The rain, however, was a mixed blessing as houses now became roofless and students fell sick as malaria ran rampant. Electricity was introduced only in 1937; until then, oil and petromax lanterns sufficed. The initial years were a period of austerity as the school struggled with funds.

GVS was the first headmaster of the Guindy School at the time of the changeover and continued in Rishi Valley as its first principal. He was instrumental in laying a strong foundation in the school in terms of education and administration, leading a lifestyle of minimal possessions, dedicated to his work and love for children.

His decade long tenure (1931-1941) was a pioneering one, with some of the teaching methods carried over from his experiences at the Guindy School. When he shifted to Rishi Valley, GVS became the first headmaster of an Indian boarding school. At Guindy, Tamil was the medium of instruction; at Rishi Valley,Telugu was added as a language of instruction. GVS laid the groundwork for the school by practicing a simple lifestyle that included meditation, a quiet life, austerity with material possessions, and harmony with nature. Indeed, the beautiful natural expanse of the valley provides for some quiet retreats for 'nature studies'--outdoor lessons as part of the timetable, which originated with GVS. On the sports field, he disallowed prize-giving ceremonies, as he felt it harboured unhealthy competition. This feature in particular has been steadfast despite the relatively 'modern' lifestyle that current students in Rishi Valley lead outside of school.

Finally, and perhaps most importantly, all senses of division were eliminated: caste, gender, religion, and that of anything which might cause fractious relationships among students. This too was important in a country on the brink of a new era in history—one in which the aim was secularism and social parity.

On 24 June 1941, an unforeseen police raid rocked the school. Some 'prohibited books' and 'leftist magazines' were seized because under the British these were banned books as they were thought to promote Indian independence.[4] Many teachers were put under house-arrest, fined or were put under probation for three years. The Director of Public Instruction even forced two longstanding teachers to resign. As a result, Subbarao became 'dangerous' for proliferating such material during the heat of the freedom struggle and the wartime constraints Britain was facing at that time. The truth of the matter was that GVS stood by freedom of thought and made a wide range of literature available to his students. The perpetrator of this incident was later found to be an unhappy senior student who tipped off the police about the presence of communist literature on campus.[4] This unexpected event ended GVS's tenure as principal.

The resignation of GVS had several consequences that brought the school to a standstill: expenditures were cut back sharply and some of the best teachers left. This was also a period of transition at the school as several principals came and departed quickly. At this time, Krishnamurti was in the United States, unable to travel, as he was marked as an “undesirable alien”; he was only able to return in late 1947 after Indian independence.. A person who directed the school at this time and would later emerge as a driving force behind it was Ms. Muriel Payne. She came to Rishi Valley, influenced by Krishnamurti, in an attempt to revive it. Along with five others, she set up a group in 1948, which tried to gauge the situation and get the school back on track. This experiment ended abruptly and in July 1949; Rishi Valley was shut down..

Ms. Payne's experiment might have failed, but her interest in the school had not waned. She was instrumental in restarting the school under a new administration with F. Gordon Pearce, a noted educator, at the helm. Krishnamurti took a renewed interest in the school. New people were getting involved and a new kind of school emerged..

In July 1950, the school was officially reopened. The fees were reduced to a level so as to attract a wide range of students without putting too much pressure on the budget. To ensure a good start, the staff agreed to an initial lowered salary until the school became stabilized. The problems faced by Pearce were many: no finances, friction amid a whole new faculty, and that same year a terrible drought with the region being declared a famine area. It was up to Pearce to revitalize the school.