Unlike the German Confederation, the North German Confederation was an actual state. The new Confederation was the product of the second War of German Unification, respectively the German War of 1866 (see Wars of German Unification) and the first unified country on German soil. Otto von Bismarck had been able to ally with 17 northern states during wartime. The so-called alliance of August was now the foundation of the union. The North German Confederation (Norddeutscher Bund) was a union of the German states north of the Main River (without the southern states Wuerttemberg, Baden, Southern Hesse, Bavaria, and Austria). The federal-state was formed after Prussia had defeated Austria in the Seven Weeks War of 1866. The capital was Berlin and the king of Prussia at the same time its president. He appointed the chancellor and was commander in chief.  The new federal law included transportation, coinage, customs matters, military matters, and trade. The Prussian chancellor Otto von Bismarck was at the same time chancellor of the North German Confederation. The Reich's Flag (see below) became the official flag of representation for the new nation. It was a combination of the Prussian colors black and white and the colors white and red, which the Hansa used. A description of the Confederation's flag was disseminated in the United States so that German ships could be welcomed in American waters.

The North German Confederation occupied the larger part (79%) of the former German Confederation, and Prussia was the union's biggest state. The Peace of Prague of 1866 allowed the southern German states to form a union as well. Still, a Bavarian initiative failed because the other states feared economic and military dependence. Therefore, they sought closer ties to Prussia. The new Confederation had a strong appeal to southern states because of its strong leadership, the federal system, and some codetermination for its citizens in parliament. Simultaneously, Bismarck's alliances with the southern German states and the reorganized customs union in 1867 came level to a unified German state, stretching from the North and Baltic Sea to the Alps.

The new Confederation's marine highly accepted the flag. It was also the first preference among ordinary people and merchants who argued that its design was more dignified as a plain and humble Tricolore, used by a coal-carrying steamboat. The first design changed over the following decades a few times. It became an easily recognizable symbol of Germany until the end of World War 1 and the proclamation of the Weimar Republic. Germany's first democracy made several undertakings to offer the same design as a black, red, and golden version, but it was rejected due to the stab-in-the-back legend.