In 1866 Bismarck nonetheless continued his efforts to divert liberal interest from the budget conflict and toward the success of Prussian arms. He repeatedly told the Austrians that their future lay in the south and that they would be wise to yield dominance in Germany. But in both cases his words fell on deaf ears. Bismarck had clearly decided to play the German national card in order to achieve a Prussian-dominated Germany. After making sure that Russia would not intervene and after gaining an alliance with Italy, he set about fostering conflict with the Austrians. He stirred up Hungarian nationalism against Austria--a policy that showed how radical means could be used in the service of his own conservative ends. On June 9, 1866, Prussian troops invaded Holstein, and a few days later Austria, supported by the smaller states of Saxony, Hesse-Kassel, and Hanover, went to war. Within six weeks Prussia had inflicted a major defeat on the Austrians at Königgrätz (Sadowa). Bismarck then counseled moderation so that Austria would not be humiliated. Against a king and generals who wanted to march to Vienna, he urged a quick cessation of hostilities, recognizing that other powers might intervene if the war continued. Europe was stunned: in a few weeks Prussia had transformed the distribution of power in central Europe. Austria, the major power in Germany for centuries, was now relegated to secondary status.
Bismarck now showed both ruthlessness and moderation. The Peace of Nikolsburg scarcely demanded anything from Austria. But Hanover, Hesse-Kassel, Nassau, and Frankfurt, all of which had fought against Prussia, were annexed, to the shock of conservatives. The king of Hanover was removed from power, as was the ruling house in Hesse. While conservatives were appalled at the German civil war between the two powers who had been opposed to revolution, the liberal middle class flocked to support Bismarck. Their goal of German unification seemed close at hand. Bismarck, moreover, now apologized for his high-handedness over the issue of the military budget and offered an olive branch of peace to the liberals. The party divided over Bismarck's offer. He had achieved one of his major goals--gaining a large part of the middle class to see the Prussian monarchy as their ally.
The North German Confederation was established in 1867 with Prussia as its matrix. Its constitution, on the surface, appeared progressive. To begin with, it established universal manhood suffrage with a secret ballot. But this was a result of Bismarck's belief that the vast majority of Prussians, if enfranchised, would vote conservative. From this perspective, a restricted ballot aided the liberals. (Of course, in 1867 neither the socialists nor the Catholic Centre had established political parties.) Moreover, whereas in theory the lower house (Reichstag) seemed an important reservoir of power given its ability to reject any bill, in practice its powers were circumscribed in the areas of military and foreign policy. Ministers were chosen by and responsible to the king and not the legislature. Nevertheless, the constitution provided a basis for evolution in a democratic direction.
Although Bismarck voiced doubts whether unification would occur in his lifetime, he actually set about tying the southern states to the north almost immediately. An all-German customs parliament was proposed, joint military training was negotiated, and a plan was advanced which entailed that the southern states recognize William as German emperor. All these efforts failed because of popular opposition in the south. Bismarck then sought to propel history a bit faster by seeking conflict with France. If he could not bring the south into a united German nation by reason, he would rely on the passions aroused by war. Ever the master tactician, he worked behind the scenes to be certain that neither Russia nor Austria would intervene in such a war. Nor did he have to work hard to produce a conflict, because the French emperor, Napoleon III, was indignant at the sudden emergence of Prussia, especially since he did not receive the compensation he sought--the annexation of Luxembourg.
When in 1869 the Spanish throne was offered to the king's cousin, Prince Leopold of Hohenzollern-Sigmaringen, Napoleon III perceived this as an effort to encircle France. He twice sent his ambassador, Vincent Benedetti, to the Prussian king at Bad Ems, once to demand that acceptance of the offer be withdrawn (which it was on July 12) and a second time to demand that under no circumstances should a member of the Hohenzollern family accept the Spanish throne in the future. The king politely refused the second request. Bismarck received a telegram from Bad Ems (the Ems telegram) giving a detailed account of the interview between William I and the French ambassador, which he proceded to edit and abridge for the press in such a way that the French appeared to seek a humiliation of the Prussian monarch, and the monarch's rejection of Napoleon's demands seemed insultingly brusque to the French. The French responded by declaring war on Prussia on July 19, 1870. When the French were decisively defeated at Sedan in September, it appeared as though Bismarck would be able to score a third rapid victory in seven years. But guerrilla warfare broke out, and Paris held out despite the capture of the emperor. Bismarck, however, stirred anti-French passions to such a fever pitch that in January 1871 the four southern states joined the North German Confederation to create the German Empire. The lesser German solution, with seven million German-speaking Austrians excluded, was the result of Bismarck's three wars. He was showered with honours and hailed as a national hero.
"Bismarck, Otto von" Encyclopædia Britannica Online.