The whole responsibility for the payment of the remainder of the interest, amounting annually to over a hundred million gulden, and the management of the debt, was left to the Austrians. The Hungarians wished that a considerable part of it should be repudiated. It was then agreed that the two states should form a Customs Union for the next ten years; the customs were to be paid to the common exchequer; all sums required in addition to this to meet the expenses were to be provided as to 30% by Hungary and as to 70% by Austria. After the financial question had been thus settled, the whole of these arrangements were then, on the 21st and the 24th of December 1867, enacted by the two parliaments, and the system of dualism was established.

The acts were accepted in Austria out of necessity; but no parties were really satisfied. The Germans, who accepted the principle of dualism, were indignant at the financial arrangements; for Hungary, while gaining more than an equal share of power, paid less than one-third of the common expenses. On the other hand, according to British ideas of taxable capacity, Hungary paid, and still pays, more than her share. The Germans, however, could at least hope that in the future the financial arrangements might be revised; the complaints of the Slav races were political, and within the constitution there was no means of remedy, for, while the settlement gave to the Hungarians all that they demanded, it deprived the Bohemians or Galicians of any hope that they would be able to obtain similar independence. Politically, the principle underlying the agreement was that the empire should be divided into two portions; in one of these the Magyars were to rule, in the other the Germans; in either section the Slav races - the Serbs and Croatians, the Czechs, Poles and Slovenes - were to be placed in a position of political inferiority.[6]

The logical consistency with which the principle of Dualism was carried out is shown in a change of title. By a letter to Beust of the 14th of November 1868 the emperor ordered that he should henceforward be styled, not as before "Emperor of Austria, King of Hungary, King of Bohemia, etc.," but "Emperor of Austria, King of Bohemia, etc., and Apostolic King of Hungary," thereby signifying the separation of the two districts over which he rules. His shorter style is "His Majesty the Emperor and King," and "His Imperial and Apostolic Royal Majesty"; the lands over which he rules are called "The Austrian-Hungarian Monarchy" or "The Austrian-Hungarian Realm." The new terminology, "Imperial and Royal" (Kaiserlich und Königlich), has since then been applied to all those branches of the public service which belong to the common ministries; this was first the case with the diplomatic service; not till 1889 was it applied to the army, which for some time kept up the old style of Kaiserlich-Königlich; in 1895 it was applied to the ministry of the imperial house, an office always held by the minister for foreign affairs.

The minister for foreign affairs was at first called the Reichskanzler; but in 1871, when Andrássy succeeded Beust, this was given up in deference to Hungarian feeling, for it might be taken to imply that there was a single state of which he was minister. The old style Kaiserlich-Königlich, the "K.K." which has become so familiar through long use, is still retained in the Austrian half of the monarchy. There are, therefore, e.g., three ministries of finance: the Kaiserlich und Königlich for joint affairs; the Kaiserlich-Königlich for Austrian affairs; the Királyé for Hungary.

The settlement with Hungary consisted then of three parts: - (1) Common affairs. the political settlement, which was to be permanent and has since remained part of the fundamental constitution of the monarchy; (2) the periodical financial settlement, determining the partition of the common expenses as arranged by the Quota-Deputations and ratified by the parliaments; (3) the Customs Union and the agreement as to currency - a voluntary and terminable arrangement made between the two governments and parliaments. The history of the common affairs which fall under the management of the common ministries is, then, the history of the foreign policy of the empire and of the army. It is with this and this alone that the Delegations are occupied, and it is to this that we must now turn. The annual meetings call for little notice; they have generally been the occasion on which the foreign minister has explained and justified his policy; according to the English custom, red books, sometimes containing important despatches, have been laid before them; but the debates have caused less embarrassment to the government than is generally the case in parliamentary assemblies, and the army budget has generally been passed with few and unimportant alterations.

For the first four years, while Beust was chancellor, the Foreign policy. foreign policy was still influenced by the feelings left by the war of 1866. We do not know how far there was a real intention to revenge Königgrätz and recover the position lost in Germany. This would be at least a possible policy, and one to which Beust by his previous history would be inclined. There were sharp passages of arms with the Prussian government regarding the position of the South German states; a close friendship was maintained with France; there were meetings of the emperor and of Napoleon at Salzburg in 1868, and the next year at Paris; the death of Maximilian in Mexico cast a shadow over the friendship, but did not destroy it. The opposition of the Hungarians and financial difficulties probably prevented a warlike policy. In 1870 there were discussions preparatory to a formal alliance with France against the North German Confederation, but nothing was signed.[7] The war of 1870 put an end to all ideas of this kind; the German successes were so rapid that Austria was not exposed to the temptation of intervening, a temptation that could hardly have been resisted had the result been doubtful or the struggle prolonged.