Stein was from an old Franconian family. He was born on the family estate near Nassau, studied at Göttingen, and entered the civil service. Prussian conservatism hampered him in his efforts to bring about changes. In 1807, he was removed from office by the King for refusing to accept the post of Minister of Foreign Affairs, but was recalled after the Peace of Tilsit.
After it became known that he had written a letter in which he criticized Napoleon, Stein was obliged to resign which he did on November 24, 1808, and retired to the Austrian Empire, from which he was summoned to the Russian Empire by Tsar Alexander I in 1812. After the Battle of Leipzig in 1813, Stein became head of the council for the administration of the re-conquered German countries.
In his old age he expressed his gratitude to his parents for the influence of their religious and truly German and knightly example. He added, "My view of the world and of human affairs I gathered as a boy and youth, in the solitude of a country life, from ancient and modern history, and in particular I was attracted by the incidents of the eventful history of England." The influence of English ideas, which was so potent a factor in the lives of Voltaire, Rousseau, Talleyrand and many others in the eighteenth century, was therefore potently operative in the early career of Stein. He does not seem to have gone to any school but in 1773 he went with a private tutor to the University of Göttingen in Hanover, where he studied jurisprudence, but also found time to pursue his studies in English history and politics, whereby, as he wrote, his predilection for that nation was confirmed. In 1777 he left Göttingen and proceeded to Wetzlar, the legal centre of the Holy Roman Empire, in order to see the working of its institutions and thereby prepare himself for a career in law. Next, after a stay at each of the chief South German capitals, he settled at Regensburg in order to observe the methods of the Imperial Diet. In 1779 he went to Vienna, and then proceeded to Berlin early in 1780.
There his admiration for Frederick the Great, together with his distaste for the pettiness of the legal procedure at Wetzlar, impelled him to take service under the Prussian monarch. He was fortunate in gaining an appointment in the department of mines and manufactures, for at the head of this office was an able and intelligent administrator, Friedrich Anton von Heynitz, who helped him to master the principles of economics and civil government. In June 1785 he was sent for a time as Prussian ambassador to the courts of Mainz, Zweibrücken and Darmstadt, but he soon felt a distaste for diplomacy, and in 1786-1787 he was able to indulge his taste for travel by a tour in England, where he pursued his researches into commercial and mining affairs. In November 1787 he became Kammerdirektor (director of the board of war and domains) for the king's possessions west of the river Weser, and in 1796 he was appointed supreme president of all the Westphalian chambers dealing with the commerce and mines of those Prussian lands. Among the benefits which he conferred on these districts, one of the chief was the canalization of the river Ruhr which thenceforth became an important outlet for the coal of that region. He also improved the navigation of the Weser, and kept well the main roads committed to his care.
Stein's early training, together with the sternly practical bent of his own nature, made him completely impervious to the enthusiasm which the French Revolution had aroused in many minds in Germany. He disliked its methods as an interruption to the orderly development of peoples. Nevertheless he carefully noted the new sources of national strength which its reforms called forth in France.
Meanwhile Prussia, after being at war with France during the years 1792–1795, came to terms with it at Basel in April 1795, and remained at peace until 1806, though Austria and South Germany continued the struggle with France for most of that interval. Prussia, however, lost rather than gained strength at this time, for Frederick William III, who succeeded the weak and sensual Frederick William II in November 1797, was lacking in foresight, judgment and strength of character. He too often allowed public affairs to be warped by the advice of secret and irresponsible counsellors, and persisted in the policy of subservience to France inaugurated by the Treaty of Basel. It was under these untoward circumstances that Stein in 1804 took office at Berlin as minister of state for trade. He soon felt constrained to protest against the effects of the Gallophile policy of the chief minister, Christian Graf von Haugwitz, and the evil influences which clogged the administration. Little, however came of Stein's protests, though they were urged with his usual incisiveness and energy. Prussian policy continued to progress on the path which led to the disaster at Jena (October 14, 1806).
The king then offered Stein the portfolio for foreign affairs, which the minister declined to accept on the ground of his incompetence to manage that department unless there was a complete change in the system of government. The real motive for his refusal was that he desired to see Karl August von Hardenberg take that office and effect, with his own help, the necessary administrative changes. The king refused to accept Hardenberg, and, greatly irritated by Stein's unusually outspoken letters, dismissed him altogether, adding that he was a refractory, insolent, obstinate and disobedient official. Stein now spent in retirement the months during which Napoleon completed the ruin of Prussia, but he saw Hardenberg called to office in April 1807 and important reforms effected in the cabinet system. During the negotiations at Tilsit, Napoleon refused to act with Hardenberg, who thereupon retired. Strange to say, the French emperor at that time suggested Stein as a possible successor. No other strong man was at hand who could save the ship of state, and on October 8 1807 Frederick William, utterly depressed by the terrible terms of the treaty of Tilsit, called Stein to office and entrusted him with very wide powers.
Stein was now for a time virtually dictator of the reduced and nearly bankrupt Prussian state. The circumstances of the time and his own convictions, gained from study and experience, led him to press on drastic reforms in a way which could not otherwise have been followed. First came the Edict of Emancipation, issued at Memel on October 9, 1807, which abolished the institution of serfdom throughout Prussia from October 8, 1810. All distinctions affecting the tenure of land (noble land, peasants' land, etc.) were also swept away, and the principle of free trade in land was established forthwith. The same famous edict also abrogated all class distinctions respecting occupations and callings of any and every kind, thus striking another blow at the caste system which had been so rigorous in Prussia. Stein's next step was to strengthen the cabinet by wise changes, too complicated to be enumerated here. He also furthered the progress of the military reforms which are connected more especially with the name of Gerhard Johann David von Scharnhorst. They refashioned the Prussian army on modern lines, with a reserve system. Stein's efforts were directed more towards civil affairs, and in this sphere he was able to issue a measure of municipal reform (November 19, 1808) which granted local self-government on enlightened yet practical lines to all Prussian towns, and even to all villages possessing more than 800 inhabitants.
Shortly afterwards the reformer had to flee from Prussia. In August 1808 the French agents, who swarmed throughout the land, had seized one of his letters, in which he spoke of his hope that Germany would soon be ready for a national rising like that of Spain. On September 10, Napoleon gave orders that Stein's property in the new kingdom of Westphalia should be confiscated, and he likewise put pressure on Frederick William to dismiss him. The king evaded compliance but the French emperor, on entering Madrid in triumph, declared (December 16) Stein to be an enemy of France and the Confederation of the Rhine and ordered the confiscation of all his property in the Confederation. Stein saw that his life was in danger and fled from Berlin (January 5, 1809). Thanks to the help of his former colleague, Count Friedrich Wilhelm Graf von Reden, who gave him an asylum in his castle in the Riesengebirge, he succeeded in crossing the frontier into Bohemia.
For three years Stein lived in the Austrian Empire, generally at Brünn, but in May 1812 he received an invitation from Emperor Alexander I of Russia to visit Saint Petersburg, seeing that Austria was certain to range herself on the side of France in the forthcoming Franco-Russian War. At the crisis of that struggle Stein may have been one of the influences which kept the tsar determined never to treat with Napoleon. When the miserable remains of the Grand Army reeled back into Prussia at the close of the year, Stein urged the Russian emperor to go on and free Europe from the French domination.
Events now brought Stein rapidly to the front. On December 30, 1812 the Prussian general Hans David Ludwig Yorck von Wartenburg signed the Convention of Tauroggen with the Russian general Hans Karl von Diebitsch for neutralization of the Prussian corps at and near Tilsit, and for the free passage of the Russians through that part of the king's dominions. The Russian emperor thereupon requested Stein to act as provisional administrator of the provinces of East and West Prussia. In that capacity he convened an assembly of representatives of the local estates, which on February 5, 1813 ordered the establishment of a militia (Landwehr), a militia reserve and a final levy (Landsturm). The energy which Stein infused into all around him contributed not a little to this important decision, which pushed on the king's government to more decided action than at that time seemed possible. Stein now went to Breslau, whither the King of Prussia had proceeded, but the annoyance which Frederick William felt at his irregular action lessened his influence.
The Treaty of Kalisz (1813) between Russia and Prussia cannot be claimed as due to Stein's actions, which were reprehended in court circles as those of a fanatic. At that time the great patriot fell ill of a fever and complained of total neglect by the king and court. He recovered, however, in time to take part in the drafting of a Russo-Prussian convention (March 19, 1813) respecting the administration of the districts which should be delivered from French occupation. During the varying phases of the campaign of 1813 Stein continued to urge the need of war a outrance against Napoleon. The Allies, after the entry of England and Austria into the coalition, conferred on Stein the important duties of superintending the administration of the liberated territories. After the great Battle of Leipzig (October 16-19, 1813) Stein entered that city the day after its occupation by the Allies and thus expressed his feelings on the fall of Napoleon's domination: "There it lies, then, the monstrous fabric cemented by the blood and tears of so many millions and reared by an insane and accursed tyranny. From one end of Germany to the other we may venture to say aloud that Napoleon is a villain and the enemy of the human race."
Stein wanted to see Germany reconstituted as a nation, but was frustrated by Metternich, who gained the alliance of the rulers of south and central Germany for his empire, on the understanding that they were to retain their old powers. Austria and the secondary German states resisted all such proposals, and Stein blamed the Prussian chancellor Hardenberg for vacillation. Stein shared in the desire of Prussian statesmen to absorb Saxony; in that too he was doomed to disappointment. On May 24 1815 he sent to his patron, the emperor Alexander, a detailed criticism of the federal arrangements proposed for Germany. He retired after the Congress of Vienna, and disliked the postponement of the representative system of government which Frederick William had promised to Prussia in May 1815.
Stein refused to act as Prussian representative at the Frankfurt Parliament, which he regarded as a mere travesty of the central federal institution which he had hoped to see. By indirect means he did what he could to check the violence of political reaction. His chief interest was in the study of history, and in 1818–1820 he worked hard to establish the society for the encouragement of historical research and the publication of the Monumenta Germaniae historica, of which his future biographer, Georg Heinrich Pertz, became the director. Stein died at Cappenberg in Westphalia on 29 June 1831. His burial ground is in the city of Bad Ems near Koblenz.
Research has shown that Stein's credit for originating many of the far-reaching reforms of 1807/8 must be shared with Theodor von Schön and many others. A popular legend named him as the founder of the Tugendbund, an institution which he always distrusted. Stein's enlightenment, insight into the needs of the time, and energy, imparted momentum to the reform movement.