If you're on Windows: which command line interface are you talking about?
The "math.exe" program is a console mode (i.e. "DOS prompt") interface to the Mathematica kernel. If you use that, you have access to the standard Windows console command-line editing; it is automatically provided by the OS to all console mode programs. You can use the arrow keys to move around in previous commands, and you can edit, insert, and delete, copy, cut and paste using the traditional DOS-style editing and function keys.
The "MathKernel.exe" program -- which is what appears as "Wolfram Mathematica 8 Kernel" in your Start Menu -- is a very simple GUI windowed interface without any line editing or other special features.
I usually use the Mathematica kernel by running "math.exe" inside a console, which I have set to be as tall as the screen and with a very large scrollback buffer (set using the console's "Properties" menu).
A LATER UPDATE: In Mathematica 9, the "math.exe" program uses a new and different keyboard editing system that it did before, one based on GNU readline. But you can get rid of that and go back to standard Windows console command-line editing by removing or renaming the file term.dll
in $TopDirectory\SystemFiles\Kernel\Binaries\Windows
(32 bit) or Windows-x86-64
(64 bit).
AN EVEN LATER UPDATE: term.dll
is now in $TopDirectory\SystemFiles\Libraries\Windows
or ...\Windows-x86-64