Peabody was born in 1795 in what was then South Danvers (now Peabody), Massachusetts. His family had Puritan ancestors in the state. As one of 7 children in a poor family, George suffered some deprivations during his childhood, and was able to attend school for only a few years. He later expressed "I have never forgotten and never can forget the great privations of my early years". These factors influenced his later devotion to both thrift and philanthropy.

While serving as a volunteer in the War of 1812, Peabody met Elisha Riggs, who, in 1814, provided financial backing for what became the wholesale dry goods firm of Riggs, Peabody & Co., specializing in importing dry goods from Britain. Branches were opened in New York and Philadelphia in 1822. Riggs retired in 1829, and the firm became Peabody, Riggs & Co., with the names reversed as Peabody became the senior partner.

In 1816, he moved to Baltimore, where he made his career and would live for the next 20 years. He established his residence and office in the old Henry Fite House, and became a businessman and financier.

Peabody first visited England in 1827 to purchase wares, and to negotiate the sale of American cotton in Lancashire. He subsequently opened a branch office in Liverpool, and British Business began to play an increasingly important role in his affairs. He appears to have had some help in establishing himself from Sir william Brown, 1st Baronet, of Richmond Hill and James Brown, sons of another highly-successful Baltimore businessman, the Irishman Alexander Brown (founder of the venerable investment and banking firm of "Alex. Brown & Sons" in 1801), who managed their father's Liverpool office, opened in 1810.

In 1837, Peabody took up residence in London, and the following year, he started a banking Business trading on his own account. The banking firm of "George Peabody and Company" was not, however, established until 1851. It was founded to meet the increasing demand for securities issued by the American railroads, and – although Peabody continued to deal in dry goods and other commodities – he increasingly focused his attentions on merchant banking, specializing in financing governments and large companies. The bank rose to become the premier American house in London.

Although Peabody was briefly engaged in 1838 (and later allegedly had a mistress in Brighton, England, who bore him a daughter), he never married. Ron Chernow describes him as "homely", with "a rumpled face ... knobby chin, bulbous nose, side whiskers, and heavy-lidded eyes."

In the 1840s, the state of Maryland defaulted on its debt and Peabody, having marketed about half of Maryland's securities to individual Investors in Europe, became persona non grata around London. The Times of London noted that while Peabody was an "American gentleman of the most unblemished character", the Reform Club had blackballed him for being a citizen of a country that reneged on its debts. At first, Peabody sent letters to scold Baltimore friends about the need for the state to resume interest payment and rewarded reporters with small gratuities for favourable articles about the state.

At last, in 1845 he conspired with Barings to push Maryland into resuming payment by setting up a political slush fund to spread propaganda for debt resumption and elect legislators who would placate their Investors. By means of a secret account, the two firms transferred a thousand sterling to Baltimore and even bribed Daniel Webster, the orator and statesman, to make speeches for debt repayment. Their attempts were successful: pro-resumption Whigs were elected and London Bankers started to receive payments. Barrings duplicated the same tactics in Pennsylvania. Florida and Mississippi were the most persistent debtors and as such were excluded from Peabody's later philanthropies.

Peabody frequently entertained and provided letters of introduction for American businessmen visiting London, and became known for the Anglo-American dinners he hosted in honor of American diplomats and other worthies, and in celebration of the Fourth of July. In 1851, when the US Congress refused to support the American section at the Great Exhibition at the Crystal Palace, Peabody advanced £3000 to improve the exhibit and uphold the reputation of the United States. In 1854, he offended many of his American guests at a Fourth of July dinner when he chose to toast Queen Victoria before US President Franklin Pierce; Pierce's Future successor, James Buchanan, then Ambassador to London, left in a huff. At around this time, Peabody began to suffer from rheumatoid arthritis and gout.

In 1854, the Arctic Explorer Elisha Kane named the waterway off the north-west coast of Greenland "Peabody Bay", in honor of Peabody, who had funded his expedition. The waterway was later renamed the Kane Basin, but Peabody Bay survives as the name of a smaller bay at the eastern side of the basin.

On July 10, 1862 he was made a Freeman of the City of London, the motion being proposed by Charles Reed in recognition of his financial contribution to London's poor. He became the first of only two Americans (the other being 34th President and General Dwight D. Eisenhower) to receive the award. On March 16, 1867, he was awarded the United States Congressional Gold Medal, an Honorary Doctorate of Laws by Harvard University, and an Honorary Doctorate in Civil Law by Oxford University. On March 24, 1867, Peabody was elected a member of the American Antiquarian Society

Following this crisis, Peabody began to retire from active Business, and in 1864, retired fully (taking with him much of his capital, amounting to over $10,000,000, or £2,000,000). Peabody, Morgan & Co. then took the name J.S. Morgan & Co.. The former UK merchant bank Morgan Grenfell (now part of Deutsche Bank), international universal bank J P Morgan Chase and investment bank Morgan Stanley can all trace their roots to Peabody's bank.

In America, Peabody founded and supported numerous institutions in New England, the South, and elsewhere. In 1867–68, he established the Peabody Education Fund with $3.5 million to "encourage the intellectual, moral, and industrial education of the destitute children of the Southern States." His grandest beneficence, however, was to Baltimore, the city in which he achieved his earliest success.

Peabody's birthplace, South Danvers, Massachusetts, changed its name in 1868 to the town (now city) of Peabody, in honor of its favorite son. In 1869, the Peabody Hotel in Memphis, TN, was named in his memory. A number of Elementary and High Schools in the United States are named after Peabody.

A statue sculpted by william Wetmore Story stands next to the Royal Exchange in the City of London, unveiled by the Prince of Wales in July 1869: Peabody himself was too unwell to attend the ceremony, and died less than four months later. A replica of the same statue, erected in 1890, stands next to the Peabody Institute, in Mount Vernon Park, part of the Mount Vernon neighborhood of Baltimore, Maryland.

His will provided that he be buried in the town of his birth, Danvers, Massachusetts. Prime Minister william Ewart Gladstone arranged for Peabody's remains to be returned to America on HMS Monarch, the newest and largest ship in the Royal Navy, arriving at Portland, Maine, where they were received by US Admiral David Farragut. He was laid to rest in Harmony Grove Cemetery, in Salem, Massachusetts, on February 8, 1870. Peabody's death and the pair of funerals were international news, through the newly completed trans-Atlantic underwater telegraph cable. Hundreds of people participated in the ceremonies and thousands more attended or observed.

In 1900, Peabody was one of the first 29 honorees to be elected to the Hall of Fame for Great Americans, located on what was then the campus of New York University (and is now that of Bronx Community College), at University Heights, New York.

His birthplace at 205 Washington Street in the City of Peabody is now operated and preserved as the George Peabody House Museum, a museum dedicated to interpreting his life and legacy. There is a blue plaque on the house where he died in London, No. 80 Eaton Square, Belgravia, erected in 1976.

George Peabody provided benefactions of well over $8 million ($158,000,000 in 2017 dollars), most of them in his own lifetime. Among the list are:

On March 16, 2018, Google honored Peabody with a Google Doodle on the 151st anniversary of Peabody being awarded the Congressional Gold Medal. The mural reproduced in the Google Doodle is physically located within the lunchroom of George Peabody Elementary School in San Francisco.