After the December constitution had been sanctioned, Franz Joseph appointed a new cabinet, which was named the “bourgeois ministry” by the press because most of its members came from the German middle class (though the prime minister belonged to the Austrian high aristocracy). In 1868 and 1869 that ministry was able to enact several liberal reforms, undoing parts of the concordat of 1855 between Austria and the papacy. Civil marriage was restored; compulsory secular education was established; and interconfessional relations were regulated, in spite of a strong protest from the Roman Catholic Church. In 1870 the Austrian government used the promulgation of the dogma of papal infallibility as pretext for the total abrogation of the concordat.

The progressive legislation of the bourgeois cabinet stood in sharp contrast to its inability to cope with the demands of the non-German nationalities. In 1868 the Czechs and the Poles issued declarations demanding a constitutional status analogous to that of the Hungarians. The government in Vienna did give the Poles in Galicia a considerable amount of self-government, which was later used to Polonize the Ruthenian minority. In 1871 a ministry for Galician affairs was set up, and the Poles remained the staunchest supporters of the Austrian government well into World War I.

The bourgeois ministry was split into a liberal-centralist and a conservative-federalist faction; its members could not reach an agreement on policies to be adopted. The liberal members of the cabinet opposed Czech demands; the conservatives were willing to consider them. Franz Joseph, indignant because of the anticlerical policy of the liberals, dismissed his prime minister, Karl, Fürst (prince) von Auersperg, in 1868 and replaced him with the conservative Eduard, Graf (count) von Taaffe, his boyhood friend. A period of indecision nevertheless persisted. The emperor wavered between the liberals, whose anticlericalism and parliamentarianism he disliked but with whom he sympathized in their centralist German-oriented policy, and the conservatives, whose political legislation he favoured but who aroused his fears by their demands for federalization. Neither Taaffe nor his successors Leopold Hasner, Ritter (knight) von Artha (1870), and Alfred, Graf Potocki (1870–71), could solve the Czech problem.

The Franco-German War of 1870–71 temporarily diverted public attention from the Czech demands. Opinion was divided strictly along lines of nationality: Austro-Germans celebrated the victories of the Prussian army, whereas the Slavs were decidedly pro-French. The Austrian government remained neutral because conflicting international interests had blocked Austro-French negotiations (which had culminated in a meeting of Franz Joseph and French emperor Napoleon III at Salzburg in 1867). The victory of Prussian chancellor Otto von Bismarck and the establishment of the German Empire under the leadership of the Prussian king gave finality to the results of the 1866 Austro-Prussian War. Austria was definitely excluded from the German scene, and a reorientation of dynastic interests seemed a logical consequence. Franz Joseph decided to explore the possibility of satisfying the Czechs with some measure of federalism. On February 5, 1871, he appointed as prime minister Karl Siegmund, Graf von Hohenwart, a staunch clericalist. The driving mind in Hohenwart’s cabinet was the minister of commerce, Albert Schäffle, an economist whose socialism may not have appealed to the emperor but whose federalism did.

As a first step toward conciliation with the Czechs, the cabinet dissolved parliament and the provincial diets. When the Bohemian elections improved the federalist position, Hohenwart proceeded to deal directly with the Czechs, copying in certain measure the method used to conclude the compromise with Hungary. Secret talks with the Czech leaders František Ladislav Rieger and František Palacký led Franz Joseph to issue an imperial rescript on September 12, 1871, promising the Czechs recognition of their ancient rights and showing his willingness to take the coronation oath. The Czechs answered this rescript on October 10, 1871, by submitting a constitutional program of 18 articles, called the Fundamental Articles. According to that program, Bohemian affairs should be regulated along the principles of the Hungarian compromise, raising Bohemia to a status equal to Hungary. With that, Hohenwart, who had been up against violent German opposition from the first day of his appointment, aroused Hungarian resistance too. Andrássy, fearing that the Czech program could incite minority groups in Hungary, convinced Franz Joseph that the stability of the Habsburg monarchy was endangered by the Czech program. On October 27, 1871, Hohenwart was dismissed, and Franz Joseph returned the government to the hands of the German liberals.

The new Austrian prime minister, Adolf, Fürst von Auersperg, entrusted the key ministries of his cabinet to university professors and lawyers. The “ministry of doctors,” as it was nicknamed, concentrated on legal and administrative reform and tried to strengthen German control in parliament. After the dismissal of Hohenwart, the Czechs turned to passive resistance, withdrawing from the Bohemian diet and again abstaining from attendance at the parliament in Vienna. This gave the government the chance to weaken the federalist position by introducing a bill for electoral reform. Instead of the existing modus, whereby the diets selected the deputies that were sent to parliament, the new bill set up electoral districts, each of which was to elect one deputy directly to the Reichsrat. The new system, however, preserved the old division of the electorate into curiae (socioeconomic classes), making parliament in this way a representation of German bourgeois interests.

The political victory of German capitalism took place at the very moment of a severe economic crisis. The opening of the Vienna International Exhibition of 1873 was seen as a manifestation of the material progress and economic achievements of the Habsburg monarchy. The so-called Gründerjahre, or years of expansive commercial enterprise during the late 1860s and early 1870s, however, were characterized not only by railroad and industrial expansion and the growth of the capital cities of Vienna and Budapest but also by reckless speculation. Warning signs of an imminent crisis were disregarded, and in May 1873, soon after the opening of the exhibition, the stock market collapsed.

The ensuing depression forced the government to abandon some liberal bourgeois principles. The state took over the railroads and instituted public-works projects in an attempt to alleviate popular distress. The government survived the crisis, however, and German liberal political rule continued for five more years. German liberalism would pass into eclipse not because of economic or domestic crisis but as a consequence of its opposition to foreign expansion.

A far-reaching consequence of the stock market crash of 1873 was the permeation of anti-Semitism into Austrian politics. Jews were accused of being responsible for the speculative stock market activities, even though official investigations proved that many elements of the population, including some ministers and aristocrats, had participated in the Gründungsfieber, or “speculative fever,” and the attendant scandals.