The game is set in the world of New Europa, a label which is sometimes applied to the Old Continent, sometimes to the whole planet, during the Age of Steam, or the 1870s. The world resembles our own, with a number of major variations: the denizens of Faerie do exist and mingle with humans, with whom they have struck an uneasy alliance. Creatures and beasts from myth and legend exist, as do a number of characters that are considered fictional in our world. Magic works, and has allowed technology to stretch in unexpected directions. The game introduces Engine Magic which helped propel the Renaissance via a magically enabled Industrial Revolution. These subtle changes to New Europa's history has made it quite divergent from our own history.
The reader's journey through this alternate world is aided by an ego character, Tom Olam. Tom is from the real world who gets spellnapped into the world of Castle Falkenstein. It is through Tom that the player understands this world and he is used as an example of how the players are to create and play their own characters. Tom’s writing becomes the template of sorts for what the players need to do with their own characters. It should be noted that Tom Olam is a computer game designer, something that Mike Pondsmith has later gone on to do."
Source: Wikipedia, "Castle_Falkenstein_(role-playing_game)", available under the CC-BY-SA License.