Bismarck faced a diplomatic crisis in November 1863 over the duchies of Schleswig and Holstein; they were claimed by Denmark and by Frederick von Augustenburg, a German duke. Prussian public opinion strongly favoured Augustenburg's claim; however, Bismarck took an unpopular step by insisting that the territories legally belonged to the Danish monarch under the London Protocols signed a decade earlier. Nonetheless, Bismarck did denounce Danish decision to annex the duchy of Schleswig to Denmark.
With support from Austria, he issued an ultimatum for Denmark to return Schleswig to its former status; when the Danes refused, Austria and Prussia invaded, commencing the Second War of Schleswig.
As a result of the German victory, Denmark was forced to cede both duchies. Originally, it was proposed that the Diet of the German Confederation where all the states of Germany were represented should determine the fate of these duchies; however, before this scheme could be effected, Bismarck induced Austria to agree to the Gastein Convention. Under this agreement, Prussia received Schleswig, while Holstein went to the Austrians.
In 1866, Austria reneged on its prior agreement with Prussia by demanding that the Diet of the German Confederation determine the Schleswig-Holstein issue. Bismarck used Austria's demand as an excuse; charging that the Austrians had violated the Convention of Gastein and sent the Prussian troops to occupy Holstein. Provoked, Austria called for the aid of other German states, who quickly became involved in the Austro-Prussian War.
With the aid of Albrecht von Roon's army reorganization, the Prussian army was nearly the equal in numbers to the Austrian army. With the organizational genius of Helmuth von Moltke, the Prussian army defeated Austria and its allies, concluding the conflict with a crushing victory at the Battle of Koniggratz. The silent rivalry between Austria and Prussia finally ended up with the Battle on July 3, 1866, with casualties of more than 30,000 soldiers dead and wounded on both sides.
As a result of the Peace of Prague, the German Confederation was dissolved; Prussia annexed Schleswig, Holstein, Frankfurt, Hanover, Hesse-Kassel, and Nassau; and Austria promised not to intervene in German affairs. Austria was excluded, and remained outside of German affairs for most of the remaining 19th and 20th centuries.
Bismarck played a crucial role in uniting most of the German states into a single unit in the absence of Austrian influence.
In his first speech Bismarck referred to the issue of German unification by his famous remark: "the great questions of the day will not be decided by speeches and the resolutions of majorities - that was the great mistake from 1848 to 1849 - but by blood and iron." He was referring to the failed Frankfurt Parliament as the great mistakes of 1848 and 1849. Bismarck used both diplomacy and the Prussian military in order to achieve German unification.
To solidify Prussian hegemony, Prussia and several other North German states joined the North German Confederation in 1867; King Wilhelm I served as its President, and Bismarck as its Chancellor.
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