German immigrants began settling in Siebenbürgen (Transylvania) in 1143. The German-speaking enclave that formed in the Carpathians as a result was the easternmost such area in the Middle Ages. The new arrivals were referred to as 'Saxons', but in fact they came from the valleys of the Rhine and Moselle, from Flanders, Lorraine, Alsace and Luxembourg. The first Germans to settle here were, like others who came to inhabit the Zips (Spiš) region, invited by King Géza II of Hungary to live on crown territory and were awarded privileges. Royal charters, among them the Andreanum issued by Andreas II in 1224, granted the settlers more rights than any other German group in eastern Europe had ever received before. The newcomers were supposed to secure Hungary's eastern borders and to develop the rural economy. They established almost 300 villages, most centred on the characteristic fortified church, as well as a number of towns that served as staging posts for long-distance trade. Among the latter were Hermannstadt (Sibiu), Kronstadt (Braşov), Schäßburg (Sighişoara) and Bistritz (Bistriţa). Transylvania is the easternmost part of Europe to have towns of a visibly central European character.

The country's fortunes were determined by its three largest ethnic groups: the Hungarians, the Germans and the Romanians. Another large ethnic group was the gypsies, who were, however, excluded from state administrative positions. The long-established Siebenbürger Saxons, who since the Reformation had been strictly Lutheran, were joined in the 18th century by the Landler, Protestants who had been deported from their Austrian homeland. From 1867 onwards, official policy encouraged assimilation to Hungarian culture. After 1918, when the Siebenbürger Saxons voted to join Romania, they faced a policy of assimilation to Romanian culture. This was successfully resisted by the economically strong and politically and culturally well-organised minority. In around 1910, there were some 250,000 'Saxons' living in Transylvania, rising to almost 300,000 by the beginning of the Second World War.

The patents of settlement gave the German colonists favourable conditions to start from in difficult natural surroundings. Largely freed from bondage, the colonists set about cultivating the land. They drained the marshes in the Banat and in 'Swabian Turkey' (now south-western Hungary), built dykes against flooding on the Danube and the Theiss (Tisza) rivers, and cleared forests in the Hungarian highlands to provide new farming land. This activity brought about a boom in crop and livestock farming. The richness of the soil and the systematic rotation of crops were the main factors contributing to high yields. The settlers also found out how to make the best use of the prevailing climatic conditions and natural environment. The dark humus soil was mostly sown with wheat. Beside the 'Banat Gold', as it was known, maize and hemp were the main crops. Phases of technological innovation during the second half of the 19th century enabled the farmers to increase their yields even more, and they began exporting their products to other regions. Agriculture in its various forms continued to be highly profitable there until the Second World War.