The Austrian Empire was a multi-ethnic state, composed of Germans, Hungarians, Czechs, Poles, and many other Slavic groups.

Austria's defeat in the Austro-Prussian War of 1866 severely weakened its position and forced the government to seek an internal settlement.

The Hungarians (Magyars), the largest and most powerful minority group, demanded greater autonomy.

The 'Ausgleich' or Compromise of 1867 was the constitutional settlement that addressed these demands.

It restructured the state into the Dual Monarchy of Austria-Hungary.

The empire was divided into two separate states: the Austrian Empire and the Kingdom of Hungary.

Each state had its own constitution, parliament, and government.

The two states were united by a single monarch, who was Emperor of Austria and King of Hungary, and shared common ministries for foreign policy, war, and finance.

The Ausgleich satisfied the nationalist demands of the Hungarians.

However, it angered the other Slavic groups in the empire, who were denied similar status, creating new internal tensions that would contribute to the outbreak of World War I.