The political consequence of the military defeat lay in the execution of about 150 persons, the imprisonment of thousands of others, and the limitation of the entire constitutional process. Hungary was merged into the Habsburg empire to be governed by a common, centralized bureaucracy, and the backward character of agriculture and hierarchic relations of society remained practically unchanged. The Hungarian political elite attempted to hamper the operation of the repressive machinery by adopting a so-called policy of "passive resistance" and by rejecting all offices.

By the middle of the 1860s a series of disastrous wars waged by the Habsburgs had isolated Austria internationally and exhausted its treasury, while the lengthy period of passive resistance had also caused problems for the Hungarian elite. The situation was ripe for compromise. Negotiations aimed at reaching a reconciliation were started at the initiative of Ferenc Deák, the "wise man of the homeland". As result of the talks, the Habsburg Empire transformed into a dualist state federation comprising Austria and Hungary in 1867. The two equal parts of the Austro-Hungarian Monarchy obtained complete sovereignty in domestic affairs. Their respective parliaments independently accepted laws that were approved by Francis Joseph I as emperor in Vienna and as king in Budapest, and were carried out by two separate cabinets. Foreign affairs, defence and their financing remained under joint control. The Compromise led to constitutionalism and a return of most of the achievements of 1848 for the Hungarians and the Austrian Germans, the two dominant national groups in the empire.

The next near half a century saw an unprecedented economic and cultural boom in Hungary accompanied by political stability. The first modern parliamentary system - albeit with narrow electoral rights, amid conservative frameworks, and ever more sluggishly keeping pace with the requirements dictated by social mobility, and not according the claims of the national minorities making up half of the population in both parts of the Empire - operated in a predictable manner. National minorities, realizing the rigidity of the system, ultimately worked to break it up - prospects for which were favorably influenced by the establishment of independent Balkan states exercising a major impact on the southern Slav and Romanian inhabitants of the Monarchy.

The different political crises emerging at the turn of the century were, however, overshadowed by increasing material and intellectual welfare, which also went to those who were left outside the bulwarks of political power. The Hungary of the "happy times of peace" was transformed by the industrial revolution from a backward agrarian country into a relatively progressive agrarian-industrial country. National income tripled, the urban population rose from 10 per cent of the total population to one-third, and by contemporary standards it had a modern infrastructure and burgeoning bourgeois culture. In 1896, an exhibition staged to mark the thousandth anniversary of the settlement of the Magyar tribes in the Carpathian Basin paid worthy tribute to these achievements in Budapest which by then was a metropolis of a million residents.

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