Foreign Relations of the United States, 1955–1957, Western Europe and Canada, Volume XXVII

179. National Security Council Report¹

NSC 5712/1

Washington, May 20, 1957.

STATEMENT OF U.S. POLICY ON ICELAND

General Considerations

Importance of Iceland for U.S. National Security

1. Iceland is of great strategic importance to the United States and its membership in NATO significantly enhances NATO offensive and defensive military capabilities in the North Atlantic. Iceland now provides the United States and NATO with (a) a key link in the Early Warning System for the defense of the United States and other NATO countries; (b) an important base for anti-submarine operations; (c) forward logistic support for Striking Fleet operations; (d) a significant air base for NATO requirements; and (e) a key communications link between the United States, the United Kingdom, and other NATO countries. Denial of these advantages to the United States and NATO would result in a grave² weakening of the North Atlantic defense system; and the loss of Iceland to Soviet control would directly threaten the security of the United States.

US-Iceland Agreement for the Defense of Iceland

2. NATO has delegated to the United States responsibility for the defense of Iceland, which has no armed forces of its own and a police force of only 180 men. In fulfillment of this responsibility, the United States, on May 5, 1951, signed a Defense Agreement under which the United States is stationing forces and is developing military facilities in Iceland. Additional U.S. rights and facilities were obtained by supplementary understandings concluded in May 1954. In March 1956, the Icelandic Parliament passed a resolution calling for discussions with the United States on revision of the Defense Agreement, aiming at withdrawal of U.S. forces and having Iceland assume responsibility on behalf of NATO for maintenance of the defense installations. However, U.S.-Icelandic negotiations completed in December 1956 permitted U.S. forces to remain in Iceland under substantially the same conditions provided for in the original agreement of 1951, and established a procedure (which neither party has yet taken steps to implement) for subsequent high-level consultations between the United States and Iceland on defense arrangements.

Political Orientation

3. Although its political orientation is basically toward the West, Iceland traditionally prefers isolation and neutrality. All Icelandic political parties must take into consideration, and perhaps solicit the support of, that part of the electorate which opposes the stationing of foreign military forces in Iceland in peacetime. Icelandic politicians are particularly sensitive to any feeling in Europe or elsewhere that there is any relaxation of world tensions. Defense activities have had a marked social and economic impact on a previously isolated country of 160,000 persons, and the presence of foreign forces in Iceland inevitably is a factor in Icelandic domestic politics.

4. Since Iceland’s independence (1944), no political party has been able to elect a majority to the Icelandic Parliament. Consequently, all Icelandic Cabinets representing a majority of Parliament have been formed by a coalition between two or more parties. From 1950 until 1956 the Conservatives and the Progressives, the two largest parties, maintained an uneasy coalition in the Government. In the 1956 general election, the Progressive and Social Democratic Parties were unsuccessful in their effort jointly to elect a majority of the representatives to the Icelandic Parliament (see Annex A). Rather than be junior partners to the powerful Conservative (Independence) Party, the Progressive and Social Democratic Parties formed a coalition with the Communist-front Labor Alliance Party—each of the three parties being represented by two cabinet ministers. There are stresses within this coalition which may cause it to fall before the next regular election in 1961. Each of the three parties, including the Communist-front Labor Alliance, is using its position in the Cabinet in an attempt to strengthen its political future in Iceland.

5. The influence of the relatively small number of avowed Icelandic Communists is magnified (a) by their control of the Labor Alliance Party, which has a balance of power position in domestic Icelandic politics; (b) by their control of the Icelandic Federation of Labor; and (c) by Icelandic tolerance of Communist activities. There have been indications that (a) conflict between the Soviet-controlled Communists and left-wing Socialists in the Labor Alliance Party might result in a split in the Alliance, and (b) democratic elements will regain control of the Icelandic Federation of Labor at the next Federation election.

Economic Problems and U.S. Aid

6. Iceland’s economic problems are twofold: (a) The continuing uncertainties of an economy based largely on the fishing industry and (b) the existing inflationary pressures. A high proportion of manufactured goods and raw materials must be imported, so that the country is unusually heavily dependent on foreign trade. Exports of fish and fish products constitute about 90 per cent of Iceland’s commodity exports and provide over 70 per cent of the country’s foreign exchange income (roughly 20 per cent being derived from the operations of the U.S. base and less than 10 per cent from all other exports). Consequently, dependable markets for fish and fish products are in the short run the prime essential for Iceland’s economic health and economic orientation. In the longer run, Iceland can achieve economic stability only through diversification of its industry.

7. In recent years Iceland’s difficulties in marketing its fish in Free World countries have increased:

a. Traditionally, Britain was the largest single importer of Icelandic fish, but from 1952 until late 1956 British fish interests maintained an embargo on Icelandic fresh fish in retaliation against a unilateral promulgation by Iceland of fishing conservation regulations which had the effect of closing off areas of the high seas around Iceland to foreign fishing. Although the embargo has now been lifted and Britain is again importing Icelandic fish, it does not seem likely that the market will be fully restored to the pre-1952 level. Furthermore, the dispute over fishing rights has not been settled and any precipitous action by the Icelandic Government may result in reimposition of the British ban. The Icelandic position on territorial waters, traditionally identified with exclusive fishing rights, conflicts also with the U.S. position on this issue.

b. After imposition of the British embargo, the United States became the largest Free World importer of Icelandic fish. The U.S. domestic fishing industry has pressed repeatedly, although thus far unsuccessfully, for additional governmental restrictions on fish imports.

c. Future Icelandic trade with the Free World might be further adversely affected if Iceland failed to join a free trade area formed in Europe.

8. The Soviet bloc has taken advantage of Iceland’s marketing difficulties in the Free World by accepting Iceland’s over-priced fish in exchange for Soviet goods. As a result, the percentage of Iceland’s exports going to the Soviet bloc has increased from a level of five to seven per cent in 1949-1952 to 30 per cent in 1956. Iceland’s imports from Eastern Europe have, of course, grown at a corresponding rate, and the Soviet bloc is now supplying Iceland with most of its requirements of petroleum and cement plus substantial quantities of grain, iron, steel, and automobiles and other consumer products. In addition to its trade with Iceland, the Soviet bloc is (a) extending offers of substantial loans for various economic development projects, and (b) strengthening its political and cultural relations through diplomatic contacts, trade missions, and artistic and other delegations.

9. Iceland is experiencing a period of inflation which has been mitigated to only a minor extent by recent governmental actions controlling prices and wages. This inflation derives from labor shortages, excessive bank credit, a very high rate of investment, and relatively weak governments. With domestic price levels rising under such inflationary pressures, Icelandic exporters have had difficulty competing in commercial markets of the Free World. The official exchange rate has become unrealistic. The Icelandic Government has repeatedly resorted to special measures, and at the same time attempted to avoid outright devaluation of the currency, in efforts to maintain exports. While these steps have mitigated the situation somewhat, no effective solution has been adopted.

10. From FY 1949 to 1953 the United States made available $34.6 million in economic aid for Iceland. No additional economic aid for Iceland was made available until FY 1956, when $2.4 million in Danish kroner was loaned Denmark for reloaning to Iceland for construction of a cement plant (see Annex B). Subsequently, with a view to improving the climate for the base negotiations, $4 million was loaned to Iceland in December 1956 to generate local currency to finance economic development projects. In addition, negotiations have been completed on a $2.8 million P.L. 480 sales agreement, and arrangements have been completed for³ a loan of $5 million to cover the foreign exchange costs of constructing a power-generating station on the Sog River and tie-in facilities with the Keflavik base. Some of the local currency costs of these projects are being met from loans to Iceland of funds generated under the P. L. 480 program. Although the foregoing assistance program helped to some extent in achieving our objectives during the negotiations, its implementation may, unfortunately, help to consolidate the position of the present, Communist-influenced Government. On the other hand, failure to carry out the program would jeopardize the continuation of our political and defense relations. From 1954 through 1956 the Icelandic economy received about $15 million yearly from U.S. defense expenditures (see Annex C).

Objectives

11. To assure that U.S. forces are permitted to remain in Iceland, that facilities there continue to be available for the use of these and allied forces, and that Iceland is denied to unfriendly or potentially hostile forces.

12. To maintain in Iceland a stable government friendly to the United States and actively cooperating in NATO.

13. To check and reduce Communist economic and political influence in Iceland.

Major Policy Guidance

14. In carrying out U.S. military and other activities in Iceland under the Defense Agreement, keep in mind the nationalist, anti-militarist sensibilities of the Icelandic people, endeavor to promote harmonious relations with them, and encourage their participation— consistent with military readiness—in performing defense functions.

15. Encourage as appropriate more active Icelandic understanding of and participation in NATO defense activities relating to Iceland.

16. Attempt to assist democratic elements, both within and outside the Government, in strengthening their position against the Communists and weakening Communist influence on Icelandic policy, particularly in foreign affairs.

17. As appropriate, use economic and political pressures in order to eliminate Communist participation in the Icelandic Government.

18. Encourage the collaboration of all democratic parties in the development of a vigorous anti-Communist labor movement in Iceland, and thereby assist them to regain from the Communists, and to maintain, control of the national labor movement.

19. Take all feasible actions with respect to Iceland’s economy required to achieve U.S. objectives, particularly to prevent Iceland’s dependence on Soviet bloc markets:

a. Attempt to increase Iceland’s export market in the United States and use influence with our allies to increase Iceland’s export markets in Free World and other countries.

b. If necessary, afford economic assistance to counteract economic deterioration in Iceland adverse to U.S. interests.

c. If necessary, provide loan assistance for specific Icelandic development projects.

d. Encourage and, as feasible, assist the full exploration and exploitation of Iceland’s natural resources and the diversification of the Icelandic economy.

e. Encourage Iceland to follow sound economic policies.

f. Provide technical assistance to increase the skills needed for defense activities and to increase the efficiency of industry.

20. In maintaining the U.S. position on territorial waters and fisheries jurisdiction in the UN or in other world forums, take all feasible steps to mitigate possible adverse effects on U.S.-Icelandic relations and also to forestall any precipitate further extension by Iceland of offshore fishery controls.

21. To prepare for the possibility that the foregoing actions might fail to maintain Icelandic cooperation requisite for Free World defense facilities in Iceland, study the feasibility and desirability of special political and economic arrangements with Iceland; for example, whether Icelandic products might be exempted⁴ from U.S. customs duties and other import restrictions in return for the granting to the United States of a freer hand in defense.

[2 paragraphs (8½ lines of source text) not declassified]

1. Source: Department of State, S/S–NSC Files: Lot 63 D 351. Secret. A cover sheet, a note by the Executive Secretary of the Council saying that NSC 5712/1 had been approved by the President on May 20, a table of contents, Annexes A–E, and a financial appendix are not printed. The text of NSC 5712, May 6, is indicated in the footnotes below. (Ibid.)
2. In NSC 5712, the word “unacceptable” was used instead of the word “grave”.
3. This phrase reads “and arrangements have been completed for” in NSC 5712.
4. This phrase reads “whereby Icelandic products would be exempted” in NSC 5712.