Foreign Relations of the United States, 1958–1960, Western Europe, Volume VII, Part 2

293. Report by the Operations Coordinating Board⁰

June 25, 1958.

OPERATIONS COORDINATING BOARD REPORT ON ICELAND (NSC 5712/1)¹

(Policy Approved by the President on May 20, 1957)

(Period Covered: From November 1, 1957 Through June 25, 1958)

A. Summary Evaluation

1. The U.S. objectives in Iceland are: (a) 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; (b) to maintain in Iceland a stable government friendly to the United States and actively cooperating in NATO; and (c) to check and reduce Communist economic and political influence.

2. During the period under review these objectives have been attained to the extent that (a) the U.S. military bases continue to be available for the use of U.S. and Allied forces and Iceland has been denied to unfriendly or potentially hostile forces, and (b) government attitudes friendly to the United States and cooperative toward NATO have been maintained.

3. The maintenance of base facilities in Iceland is generally accepted by both the Icelandic public and the three democratic political parties, although the issue could be reopened for political reasons. The Communists have made continuing but unsuccessful efforts to revive the defense issue, and the National Defense Party which made the ejection of the Defense Force the only plank in its platform is in process of liquidation. The democratic majority in the present government is friendly to the United States and has been able to assure cooperation in NATO.

4. This government, a coalition of two democratic parties (Progressives and Social Democrats) and the Communist-front Labor Alliance brought together for reasons of political expediency has serious internal tensions, but the cohesive forces have thus far outweighed the divisive forces. In May the government weathered its most serious test to date. Whenever a new government is formed it is not likely to include Communists. While the non-Communist majority and the opposition Independence (Conservative) Party have been able to contain Communist influence on a number of domestic and international matters, the Communists were a major factor in precipitating action by the government to extend Icelandic fishery limits. This may threaten the attainment of United States objectives in Iceland (see paragraph 7 below). However, one of the three coalition parties (the Social Democrats) appears disposed to seek a solution to this thorny question acceptable on the one hand to the three democratic parties and on the other hand to the other Western nations concerned.

5. The Communists have been largely instrumental in preventing the adoption of effective economic stabilization measures through their participation in the government and their power in the labor movement. However, the Communist position in the trade union movement has been weakened to the extent that democratic forces now have a fair chance of regaining control of the Icelandic Federation of Labor in the elections this coming fall. Nevertheless, Communist electoral support remains substantially intact and their maneuvering position in Icelandic politics has been enhanced by the decline in strength of the Social Democratic Party as revealed in the recent municipal elections, increasing bitterness between the Conservatives and Progressives, and the emergence of the fisheries limits issue.

6. Although the situation is confused and contains potentially serious dangers to the attainment of our objectives in Iceland, the OCB believes that a review of policy is not required at this time. However, developments should be followed with great care. The United States should be prepared, if opportunities for practicable action present themselves, promptly to implement the policy already provided for in NSC 5712/1 (May 20, 1957) of using economic and political pressures to eliminate Communist participation in the Icelandic Government.

B. Major Operating Problems or Difficulties Facing the United States

7. Extension of Fishery Limits.

a. The Iceland Government has for several years been under strong popular pressure from all political elements to extend its exclusive fishery limits and/or territorial waters well beyond the present limits. Partly because of our urgings, the Government agreed in 1957 to take no action until the results of the Geneva Conference on the Law of the Sea became known; but it was committed to announce an extension if those results were not satisfactory to Iceland. The Geneva Conference, which closed April 28, did not agree on a general rule on territorial waters and contiguous fishery zones. The Icelandic Government has now announced its intention unilaterally to extend its exclusive fishery limits to 12 miles from the present 4 miles on September 1, 1958.

b. If foreign fishing interests are excluded from this zone it would have serious adverse effects on the British and some Western European countries’ fishing industries. The Icelandic announcement has consequently caused diplomatic representations from other countries and a strong public protest from the British which included a statement that they could not permit any interference with British trawlers on the high seas. Roughly half of the fish caught in Iceland waters are estimated to have been caught by Iceland, the balance by Western European fishing interests—notably German and British.

c. The United States position is that unilateral extensions of territorial waters and/or establishment of contiguous fishery zones cannot be accepted. It is our hope, however, that the question of Icelandic fishery limits can be amicably settled by the countries directly concerned. The position of the Communists in the Icelandic Cabinet has enabled them by threatening to force new elections to exploit the strong sentiments aroused in Iceland over this question. If a solution cannot be negotiated it could result in a deterioration of relations between Iceland and its NATO partners and threaten Iceland’s adherence to NATO and our continued use of the bases in Iceland.

8. Economic Situation.

a. The economic situation in Iceland remains unsatisfactory. The economy continues to be beset by inflation resulting from a high level of consumer demand coupled with deficit-financed investment and inadequate credit controls. Icelandic leaders, notably the Prime Minister and the Minister of Education and Industries, have sought to educate the public on the shortcomings of the present system of disguised multiple exchange rates and bilateral barter trade. Also a committee of Icelandic economists, appointed by the Icelandic Government, recommended reforms along the lines of advice already received from the IMF and stressed the need to curtail inflationary financing of rural electrification and land reclamation. Economic legislation has recently been passed which involves some improvements, notably removal of some discriminatory elements, some depreciation of the effective exchange rate and simplification of the rules governing subsidization of export industries and taxation of imports. Despite the Government’s commitment to NATO (referred to in subparagraph c below) this legislation also involves proliferation of exchange rates, while continuing subsidization of exports on an ad hoc basis, and adds to the inflationary pressures through a general wage increase. Iceland consulted the IMF in advance regarding these recent exchange rate changes and adopted them despite the fact that the IMF did not concur. The new exchange rates system also specifically discriminates against U.S. defense expenditures in Iceland, and the Icelandic Government has been informed that the United States has noted this action and has reserved its position.

b. The Icelanders may again request external budget financial assistance before the end of the year whether or not there is a change of government. Iceland is seeking outside assistance to acquire up to 15 trawlers from Great Britain or elsewhere in the West. The Embassy has reported that it is probable that Iceland will seek a $7.5 million loan for 8 of these trawlers from the United States Development Loan Fund. Iceland has been negotiating with the Soviet Union a refinancing of indebtedness equivalent to about $3 million incurred in the purchase of fishing vessels in East Germany. It has not appeared opportune during the reporting period for the United States to exert overt pressure on the Icelandic Government to carry out an effective economic reform program.

c. Icelandic acceptance of a substantial Soviet loan was forestalled by an agreement between the Icelandic Permanent Representative to NATO and the NATO International Staff which resulted in the December 27, 1957 loan of $5 million from the United States and the German agreement to lend Iceland $2 million. At the time the U.S. loan was made, the Icelanders made a verbal commitment to NATO to attempt to undertake internal economic reform based on recommendations of either the IMF of OEEC or both. The Communists are continuing to press Iceland to accept substantial economic assistance from the Soviet bloc. While there are no present indications of acquiescence on the non-communist majority of the Cabinet, Soviet offers of assistance may well be exploited in order to seek further loans from Western sources.

d. With a view toward assisting Iceland in developing its economy, the Operations Coordinating Board has recently considered what special economic and political arrangements might be made between the U.S. and Iceland. The Board concluded that it would be inopportune to proceed further at this time with this study and agreed that the U.S. should take all appropriate action to further Iceland’s accession into the Free Trade Area and cooperation with the OEEC. The Board has also studied the question of a geological survey of Iceland.² The Board concluded that it would not be in the U.S. interest to suggest or encourage a general survey or a preliminary study of Iceland’s natural resources.

9. Export Markets. The proportion of Iceland’s export trade going to the Soviet bloc increased from 30 percent to 33 percent in 1957. (The Icelandic fish catch was reduced but the commitment to the Soviet bloc remained fixed.) However, Iceland’s export commitment to the Soviet Union was reduced from 32,000 metric tons in 1957 to 25,000 metric tons in 1958. In addition, U.S. PL 480³ sales are displacing Soviet exports to Iceland, and cement to be produced by the U.S.-financed Icelandic cement plant also will replace bloc exports to Iceland. Icelandic authorities have shown increased awareness of the desirability of avoiding excessive dependence upon trade with the Soviet bloc. The above-mentioned (1) reduction in Iceland’s export commitment to the Soviet bloc, (2) switch of wheat imports from the Soviet Union to the United States and (3) early manufacture of Icelandic cement to replace Soviet bloc cement are steps away from such dependence. The opening of a new market for Icelandic salt fish in Jamaica, a very substantial increase in sales to the U.S. in 1958, Icelandic interest in plans for a European Free Trade Area provided it includes fish products, and Icelandic cooperation with an OEEC mission to solve a program for the development of certain Western markets are also hopeful signs. However, there is a danger that if Iceland attempts to enforce its announced extension of its fishery limits Great Britain and perhaps some of the Western European countries would retaliate by denying their markets to Icelandic fish.

10. Level of U.S. Defense Forces. The Departments of State and Defense have still under consideration the implementation of the NSC action 1721–c of May 16, 1957⁴ to undertake as feasible the reduction of U.S. Army Forces currently stationed in Iceland. The Joint Chiefs of Staff have stated that it is militarily desirable to withdraw the U.S. Army Forces now in Iceland, which consist primarily of a Battalion Combat Team of about 1100 men thereby reducing the overall U.S. Military Forces in Iceland to approximately 4000 men. They further state that the Forces remaining in Iceland are adequate for internal security purposes and that the war plans of the Joint Chiefs take into consideration the defense of Iceland in case of external attack. Accordingly, the Department of Defense wished to withdraw the Battalion Combat Team by December 31, 1958. The Department of Defense also advises that the withdrawal of U.S. Army Forces is routine in nature as similar adjustments are made from time to time in U.S. Forces stationed elsewhere to perform missions in support of NATO, and that this adjustment should not prejudice increasing the garrison in Iceland as new weapons become available. From the standpoint of both logistical support and military effectiveness, the Department of Defense considers it not desirable to fragment the Battalion Combat Team by reducing numbers within the unit. The Department of State has considered that the removal of these forces, which are regarded by the Icelanders as a component of the Icelandic Defense Forces and have the specific duty of defending Iceland, is not feasible at this time for important political considerations, vis-à-vis Iceland and our other NATO allies. Further, the Department of State, CIA, and USIA feel that there is a strong possibility that withdrawal of the Army contingent would reopen the whole issue of the presence of the Defense Force in Iceland. The Department of State is checking with Embassy Reykjavik the validity of these latter considerations as they currently apply in Iceland. When Embassy Reykjavik’s reply is received, the Departments of State and Defense will resume their discussions with a view toward resolving their differences.

Note: See latest National Intelligence Estimate Number 28.4–56, Outlook for Iceland” dated 21 August 1956.⁵

0. Source: Department of State, OCB Files: Lot 62 D 430, Iceland. Secret. This report comprised a cover sheet, an undated action memorandum by the Executive Officer of the OCB, a report on Iceland, and three annexes. Only the report is printed here. The report was reviewed by the OCB at its meeting on June 25, and after some discussion, the language on troop withdrawal was agreed to by officials of the Departments of State and Defense. (Preliminary notes of the OCB meeting, June 25; ibid.)
1. See footnote 1, Document 292.
2. See footnotes 1 and 2, Document 292.
3. P.L. 480, the Agricultural Trade Development and Assistance Act of 1954, enacted July 10, 1954, provided for the disposal of U.S. agricultural surpluses abroad. (68 Stat. 454)
4. NSC Action No. 1721 provided that the Secretary of Defense would undertake as feasible the reduction of U.S. troops stationed in Iceland. (Eisenhower Library, Whitman File, NSC Records)
5. Not printed. (Department of State, INR-NIE Files)