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

298. Report by the NSC Planning Board⁰

NSC 6025

December 29, 1960.

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 [1–1/2 lines of source text not declassified]; (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 [less than 1 line of source text not declassified] weakening of the North Atlantic defense system; and the loss of Iceland to Soviet control would directly threaten the security of the United States.

U.S.-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.¹ Additional U.S. rights and facilities were obtained by supplementary understandings concluded in May 1954.² 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 1956³ 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. Normal relations between the defense forces and the Icelandic Government are conducted through a joint Defense Council. Troop-community relations and troop morale problems have been continuing causes of difficulty in the maintenance of the base and defense force. U.S. efforts to improve troop-community relations, which reached a low in the Fall of 1959, have resulted in some improvement, but serious difficulties continue and efforts to ease irksome restrictions on defense force personnel movements, customs privileges, and military police jurisdiction have been unsuccessful.

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 180,000 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 Independents (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. Rather than be junior partners to the powerful 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. After two and a half years of stress and strain within the coalition, with each party attempting to strengthen its own position and favor the interest groups it represented, the government fell in December 1958 as a result of a clash between the Progressives and Communists on how to meet the galloping inflation problem. During 1959 the Social Democrats, with the tacit parliamentary support of the Independence Party, maintained a minority-caretaker government. Elections were held in June and October 1959 in order to carry out long-needed electoral system reforms. In November 1959, the Independence and Social Democratic Parties formed a majority coalition government primarily aimed at carrying through a basic economic stabilization program.

5. The influence of the relatively small number of Moscow-line Icelandic Communists has been magnified (a) by their ability to enlist [less than 1 line of source text not declassified] isolationist extremists into Communist-front political organizations like the current Labor Alliance Party; (b) by their control of the Icelandic Federation of Labor and several large, key trade unions, which gives them great potential to disrupt the Icelandic economy; and (c) by Icelandic tolerance of Communist activities. There have been indications of internal Communist Party conflicts between Moscow-line and nationalist Communists, involving also the left-wing Social Democratic adherents to the Labor Alliance Party front-organization. No open rifts have occurred as yet, although the front-organization has lost some popular support in recent elections.

Economic Problems

6. Iceland’s economic problems derive from its overwhelming dependence on the fishing industry. A high proportion of manufactured goods and raw materials must be imported and virtually the only way for Iceland to finance these imports is through fish and fish products, which comprise 90–95% of Iceland’s commodity exports. Over 70% of the country’s total foreign exchange income is derived from exports of fish and fish products, with about 15% being derived from the expenditures of U.S. forces in Iceland and less than 10% from all other exports. Thus the necessity for finding and maintaining markets for fish and fish products has a powerful impact on Iceland’s relations with other countries. In the long-run, Iceland must achieve greater diversification of its industry if it is to have a sound, balanced economy.

7. Traditionally, Britain was the largest single importer of Icelandic fish, and also has the greatest foreign fishing interest in Icelandic waters. After Iceland unilaterally extended its exclusive fishery limits in 1952 to 4 miles, calculated on extremely extended new base lines, the British fishing interests imposed a landing ban on Icelandic fresh fish imports. The embargo was lifted in 1956 but the British market never recovered its importance for Iceland. When Iceland unilaterally further extended its exclusive fishery limits to 12 miles in 1958, the British refused to accept the new limits, and until the second United Nations Law of the Sea Conference in Geneva in March 1960, gave Royal Navy protection to their trawlers operating within the new limits. After the failure of the Law of the Sea Conference in March 1960, the British agreed informally to observe the new Icelandic fishery limits in practice as long as there continued to be good prospect for a bilateral settlement of the dispute. At present this informal agreement remains in effect.⁴

8. The United States has become the principal Free World importer of Icelandic fish, and Icelandic exporters are making further efforts to expand in the U.S. market. Since 1956, there has been a decline in attempts of U.S. domestic fishing interests to impose additional governmental restrictions with respect to imports of Icelandic products.

9. From 1940 until this year Iceland experienced inflation in various degrees resulting from labor shortages, excessive bank credit and extraordinarily high rate of investment (stimulated by the abnormal foreign exchange earnings resulting from wartime booms and defense force expenditures), direct and indirect subsidization of fishing and agricultural groups (which has encouraged inefficient practices) and a series of weak governments unable to take the necessary financial and economic measures to control inflation. During this period the Icelandic currency was over-valued, causing exporters great difficulty in marketing their fish and fish products on a competitive price basis.

10. The loss of the British market caused Iceland to turn to Soviet Bloc countries which were prepared to accept Icelandic products under bilateral trading arrangements. The percentage of Iceland’s total exports going to the Soviet Bloc has risen from 5 to 7% in 1949 to 1952, to approximately 35% in recent years. The conclusion of bilateral trading arrangements with the Soviet Bloc necessitated a considerable diversion of Icelandic imports from Free World to Soviet Bloc sources. About 25–30% of Iceland’s imports, including most of Iceland’s requirements for petroleum, iron, steel and coal and some of its consumer goods imports, are now obtained from the Soviet Bloc. The increased trade offered the Soviet Bloc opportunities for strengthened political and cultural relations through diplomatic contacts, trade missions, and artistic and other delegations. Offers of credit have also been made by the Bloc from time to time. However, Iceland’s principal difficulty has been in finding sufficient commodities to import from the Soviet Bloc to utilize the Bloc currencies earned from its exports to the Bloc. Icelandic dependence on imports from the Soviet Bloc has been somewhat counteracted by U.S. loan assistance on fertilizer, cement, and hydroelectric plants construction, and by P.L. 480 program supplies of foodstuffs and cotton.

11. The principal factors likely to determine the extent of Iceland’s future trade with the Free World are: (a) the success of the economic stabilization program introduced in 1960, (b) success in settling the fishery limits dispute with the U.K., and (c) arrangements for Icelandic trade with the countries of the Common Market and the Outer Seven.

a. The comprehensive economic stabilization program introduced in February 1960 included exchange reform and consolidation of exchange rates, trade liberalization, and a series of budget, credit, and tax measures. The program appears to be proceeding favorably although growing pressures from the Communist-dominated Federation of Labor pose a serious threat to the program. The opposition, principally Communist, may attempt to destroy the austerity program through a general strike. If price stability can be maintained, Icelandic export markets in the Free World should improve, although some of its former Free World customers have now expanded their own fishing industries. In particular, the maintenance of price stability may help Iceland to expand further its sales in the United States. Formal devaluation of the Icelandic currency and abolition of a system of export premiums have helped to minimize the pressure within the United States for the imposition of countervailing duties on Icelandic products.

b. Unless a U.K.-Icelandic settlement is reached, the British may take further retaliatory measures.

c. Iceland’s major Free World markets lie in Western Europe and the future of this trade will depend heavily on the arrangements which it is able to make with the regional trading groups now being formed in Europe. Iceland may join one of these groups, more likely the Seven, or make special arrangements with both. In either eventuality, there would appear to be prospect for increases in Icelandic trade with the Free World. If, however, Icelandic commodities are excluded from the preferential trading arrangements of these groups, the impact on Icelandic trade with the Free World is likely to be severe.

12. Even if Icelandic trade with the Free World continues to expand, it is probable that Iceland will continue to maintain a substantial amount of trade with the Soviet Bloc, unless the Bloc should decide, for political reasons, to terminate the trade.

13. From FY 1949 to 1953, the United States made available $34.6 million in economic aid to Iceland. No direct economic aid was given between FY 1953 and FY 1956, but a substantial contribution to Iceland’s foreign exchange earnings was given by the heavy construction and installation expenditures of the U.S. defense force.⁵ Following the establishment of a new Icelandic Government in July 1956—a coalition of Progressives, Social Democrats and the Communist-front Labor Alliance Party—further financial assistance was deemed essential in order to improve the climate for the base negotiations and to ensure the continuation of our political and defense relations. From July 1956 to December 1958 total U.S. assistance amounted to $20 million. Since 1958 assistance totaling $14 million has been provided primarily to support a Social Democratic caretaker government (December 1958–November 1959) in its anti-inflationary measures, and the subsequent Independence-Social Democratic majority government in carrying out a comprehensive economic stabilization program. The $14 million included a $6 million grant in FY 1961. At the time this grant was made the U.S. Government advised Iceland that it should be considered the final U.S. contribution to the stabilization program as such, that we counted on the Icelandic Government’s intention faithfully to carry out this program, and that future project loan applications should be made through orthodox channels such as the Export-Import Bank.

14. The political and economic situation in Iceland has been a matter of concern to other NATO countries as well as to the United States, and European assistance to Iceland was, on one occasion, arranged through NATO. It was through OEEC, however, that the European countries provided external assistance to Iceland in connection with the economic stabilization program and the Western European countries remain as logical potential sources for assistance should further aid be required in the future.

15. In the absence of a settlement, the British-Icelandic dispute, involving the “use of force” between two NATO allies, will remain a constant source of concern because of its possible effects on continued Icelandic membership in NATO and on the maintenance of U.S. forces and military installations in Iceland.

Objectives

16. 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.

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

18. [1–1/2 lines of source text not declassified]

Major Policy Guidance

19. 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.

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

21. [4 lines of source text not declassified]

22. 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.

23. Take all feasible actions with respect to Iceland’s economy required to achieve U.S. objectives, particularly to prevent undue Icelandic dependence on Soviet Bloc trade:

a. Use U.S. influence with our allies and other friendly countries to increase Iceland’s export markets in the Free World, and maintain maximum feasible access to United States markets for Icelandic products.

b. If external assistance is required to counteract economic deterioration in Iceland adverse to U.S. interests, urge Western European countries to provide assistance to Iceland and provide U.S. aid as needed.

c. If necessary provide loans for specific Icelandic development projects consistent with relevant U.S. loan policies.

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

e. Encourage Iceland to continue its efforts to achieve and maintain a stable economy through such means as pursuit of firm budgetary, monetary credit and wage policies.

f. If requested by Iceland, provide technical support to increase the skills needed for defense activities and to increase the efficiency of its industry.

24. 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.

25. In the event that Iceland again requests withdrawal of the Defense Force, consult with NATO; if in the best interests of the United States, also suspend construction and exercise other political and economic pressures.

26. In the event of an actual Communist seizure from within of the Government in Iceland, or the imminent threat of such seizure, be prepared to take all feasible measures [less than 1 line of source text not declassified] to deal with the situation.

0. Source: Department of State, S/S–NSC Files: Lot 63 D 351, NSC 6025 Series. Secret. On October 18, the OCB recommended that NSC 5712/1 (see footnote 1, Document 292) be brought up to date in accordance with the Presidential directive of April 7 that NSC papers be current for the new administration. (NSC Action No. 2215–c; Department of State, S/S–NSC (Miscellaneous) Files: Lot 66 D 95, Records of Action by the National Security Council) The resulting paper, NSC 6025, prepared by the NSC Planning Board, comprised a cover sheet; a memorandum from NSC Executive Secretary Lay, dated January 18, 1961, which stated that it had been approved by the President on that day; a memorandum of transmittal by Lay, dated December 29, 1960; the statement of policy; and a financial appendix. Only the statement of policy is printed here.

   According to the January 18 memorandum, pp. 3, 6, and 13 were “editorially revised” for insertion in NSC 6025, but the changes were not indicated.

   NSC 6025 was rescinded by President Kennedy on May 2, 1962.

1. For text of this agreement, see 2 UST 1195.
2. Not further identified.
3. For text of the agreement on U.S. forces in Iceland, concluded by an exchange of notes on December 6, 1956, see 7 UST 3437.
4. On March 11, 1961, the United Kingdom and Iceland signed a 3-year agreement resolving the fisheries question. In return for British abandonment of its objection to the 12-mile limit, Iceland permitted British trawlers to fish in certain areas from 6 to 12 miles offshore.
5. Since 1954, U.S. defense force expenditures for construction, operations and maintenance have contributed an average of about $12–15 million per annum to Iceland’s foreign exchange earnings. [Footnote in the source text.]