Frederick William was born in Berlin, the son of Prince Augustus William of Prussia (the second son of King Frederick William I of Prussia) and of Louise Amalie of Brunswick-Lüneburg. His mother's elder sister, Elisabeth, was the wife of Augustus William's brother King Frederick II ("Frederick the Great"). He was born in Berlin and became heir-presumptive to the throne of Prussia on his father's death in 1758, since Frederick II had no children. The boy was of an easy-going and pleasure-loving disposition, averse to sustained effort of any kind, and sensual by nature. His marriage with Elisabeth Christine of Brunswick-Lüneburg, daughter of Charles I, Duke of Brunswick-Lüneburg, contracted 14 July 1765 in Charlottenburg, was dissolved in 1769. He then married Frederika Louisa of Hesse-Darmstadt, daughter of Ludwig IX, Landgrave of Hesse-Darmstadt on 14 July 1769 also in Charlottenburg. Although he had a numerous family by his second wife, he was completely under the influence of his mistress, Wilhelmine Enke (afterwards created Countess Wilhelmine von Lichtenau), a woman of strong intellect and much ambition, and had many children by her. Frederick William before the corpulence of his middle age was a man of singularly handsome presence, not without mental qualities of a high order; he was devoted to the arts—Beethoven and Mozart enjoyed his patronage, and his private orchestra had a Europe-wide reputation. But an artistic temperament was hardly what was required of a king of Prussia on the eve of the French Revolution; and Frederick the Great, who had employed him in various services—notably in an abortive confidential mission to the court of Russia in 1780—openly expressed his misgivings as to the character of the prince and his surroundings.

The misgivings appear justified by the event. Frederick William′s accession to the throne (17 August 1786) was, indeed, followed by a series of measures for lightening the burdens of the people, reforming the oppressive French system of tax-collecting introduced by Frederick, and encouraging trade by the diminution of customs dues and the making of roads and canals. This gave the new king much popularity with the masses; while the educated classes were pleased by his removal of Frederick′s ban on the German language, by the admission of German writers to the Prussian Academy, and by the active encouragement given to schools and universities. But these reforms were vitiated in their source. In 1781 Frederick William, then prince of Prussia, inclined to mysticism, had joined the Rosicrucians, and had fallen under the influence of Johann Christoph von Wöllner (1732–1800), and by him the royal policy was inspired. Wöllner, whom Frederick the Great had described as a "treacherous and intriguing priest," had started life as a poor tutor in the family of General von Itzenplitz, a noble of the Margraviate of Brandenburg. After the general′s death and to the scandal of king and nobility, he married the general′s daughter, and with his mother-in-law′s assistance settled down on a small estate. By his practical experiments and by his writings he gained a considerable reputation as an economist; but his ambition was not content with this, and he sought to extend his influence by joining first the Freemasons and afterwards the Rosicrucians. Wöllner, with his impressive personality and easy if superficial eloquence, was just the man to lead a movement of this kind. Under his influence the order spread rapidly, and he soon found himself the supreme director (Oberhauptdirektor) of several circles, which included in their membership princes, officers and high officials. As a Rosicrucian Wöllner dabbled in alchemy and other mystic arts, but he also affected to be zealous for Christian orthodoxy, imperilled by Frederick II′s patronage of "Enlightenment", and a few months before Frederick′s death wrote to his friend the Rosicrucian Johann Rudolph von Bischoffswerder (1741–1803) that his highest ambition was to be placed at the head of the religious department of the state as an unworthy instrument in the hand of Ormesus (the prince of Prussia's Rosicrucian name) "for the purpose of saving millions of souls from perdition and bringing back the whole country to the faith of Jesus Christ." Such was the man whom Frederick William II, immediately after his accession, called to his counsels. On 26 August 1786 Wöllner was appointed privy councillor for finance (Geheimer Oberfinanzrath), and on 2 October 1786 was ennobled. Though not in name, in fact he was prime minister; in all internal affairs it was he who decided; and the fiscal and economic reforms of the new reign were the application of his theories. Bischoffswerder, too, still a simple major, was called into the king′s counsels; by 1789 he was already an adjutant-general. These were the two men who enmeshed the king in a web of Rosicrucian mystery and intrigue, which hampered whatever healthy development of his policy might have been possible, and led ultimately to disaster. The opposition to Wöllner was, indeed, at the outset strong enough to prevent his being entrusted with the department of religion; but this too in time was overcome, and on 3 July 1788 he was appointed active privy councillor of state and of justice and head of the spiritual department for Lutheran and Catholic affairs.