OK, found it - sorry for the delay. This is indeed a paraphrase of part of a remark that Otto von Bismarck made September 30, 1862 to the Prussian House of Delegates:
Germany does not look to Prussia's liberalism but to its power. Bavaria, Württemberg, Baden may indulge liberal impulses, but nobody will cast them in Prussia's role for that reason. Prussia must gather its forces and maintain them for the favorable moment, which has already been missed several times. The borders established for Prussia at the Vienna Congress are not favorable for the healthy life of the state. The great issues of the day are not decided through speeches and majority resolutions--that was the great error of 1848 and 1849--but through blood and iron.
[After attacks from the Progressives, Bismarck returned to the podium.]
I must protest that I would never seek foreign conflicts just to get over domestic difficulties; that would be frivolous. I was speaking of conflicts that we could not avoid, even though we do not seek them.
I think the original phrasing was iron and blood (Eisen und Blut), but it was later reversed, as it sounds better as Blood and Iron (Blut und Eisen).
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