STUDY OF POSSIBLE EXTENSION OF US AID TO ICELAND (FOR SUBMISSION TO THE SWNCC SPECIAL AD HOC COMMITTEE)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-01617A002900170002-0
• Release Decision: RIFPUB
• Original Classification: T
• Document Page Count: 30
• Document Creation Date: December 23, 2016
• Document Release Date: May 31, 2013
• Sequence Number: 2
• Publication Date: July 11, 1947
• Content Type: REPORT

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STUDY OF PO SIB EXTENSION OF US AID
(For iubmismion to the
NCC 6peoia1 Ad Roo Corartittee )
July 11' 1947
27072
NO CHANGE IN CLASS. 0
LJ D CL S5f"r4ED
CLASS. CHANGED TO: TS
NEXT REVIEW DATE: 9 7
BAT REV@EWER: 006514
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TABLE OF COUNTS
I. Anslysis of the Situation o 0 0 0 0 0
0 0. I
~o ~a~ie Force o o O O G. 0000 00 00 00 b o o o o 000
1" Eeonodio Situation
0 0 0 O V O G 0 O 0' a 0 0 O 04
2. For Q9ign B ee 4 , ? J .O 0 ' 0. O.
3v The Co aunist. Movement o 0
B. The atef son Government e 0 0
0 0 O 0 0 O 0 o 0 0 0 O o. 0 0 6y
C. Objectives and Methods of other Great Poore
e1 G USSR VBritain O a0 O'. o o o o a O a a a P a 0 .O a > a O O O O G - 7
2 C Great c o o C. G 0 o o a o o G o 0 a o a a G 8
II& , .1yaia of the Assistance Already Given 0 0 0 0 0 0 c 0 u 9
XIi0 US Ob jeativee o a o o. C. v 0 o 0 0 0 0 0 o 0 a C
O a C O a o O o O O u' O
A. General O O O a V- O O O e o o O O O V 0
B0 Ct-E pe6ifi? O V O V V o o V O a' O O 0 O 0 0 0 9 0 11
IL Consideration of Alternative eat of Reaching Objectives. a 0 11
A-0 Economic 0 a o a a 0 0 . 0 .0 0 . 0 o a a o O e a a 0 0 .0 ; 0 0 ' 11
B. political O O O 9 o O C
Cc: ,International Organization 0
0 0 0 ., V V V G O 0 -V O o a O 16
V. Hagnitudo-, Natczre, and Timing of the ?Eeures Required
Within the Next Three to Five Tears to Reach Theme ObjectiveGo 16'
VI. Probable Availab ,lity'of .Boonomia Aid from Existing Sources
under ?recent Policies. 0 o 0 0 0 0 0 o a o v n o 0 0 0 o 0 0 18
VIL Additional Measures Required from the United States o a 0 a a 19
VIIIO Nature of . ,rrongo aunts with the Icolandie Government to
Secure the Aeoo 4iel ent of (Xw Objectives in taking such Q
measures. a c O~ o o 0 e 0 o 0 '0 o o - o 0 C o o 0. E{ o O O o. 0 o19
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Ix. Effoots `uipon'Iooland d''apon U.S. Foreign Polioy of V0$0
Refusal to Gr4s er^o
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It in ?xpeaoted that fairly extensive s 1Q of the 1947 fish catch and
fish products to the USSR on the ba,44of dollar pants to Xa land will
case t problem of markets and dollars sit ding 1947, $owever9 'the
Govern at9e proopeots of a hocking the inflationary tread, may be -jeopardised
by Commnistrini pired etr?ilms for further wage increases bpaed on the con to
tion that taxation of - imports has . increased the cost of, living to the worker,.
While there is a possibility that the fiver t y successfully withstand
these Coaaaaunfs tbinspired reactio to a progr Which i mt in the oira stances
be deflationary, a sudden decline in Icelandic living standard would undoubtedly.
oaume the present aove , t9 s collapse and the return of the Co sts to
to
Co Gb eetives and Methods of other Great Powers
1 a U SRa For geographical reasons the USSRII a primary strategic objective
in Iceland Is to prevent the use of the Island for the defense of the Western
powers by, fostering aantin s tsrn santira nt among the Icelanders, and' oozx-.
varselyo building up Soviet influence through increased trade end cultural
relations,,, until 194.6, Soviet' trade with Iceland was insi f icant.
as a result of a %viet-Icel dlo trade agreement concluded in
May of that
ro o>s month before the first postwar national eleotions,. Soviet purchases
of Iael dic fish during 1946 amounted to 25 percent of the total catch and
exports of all kindsa to the USSR equaled 19,8 percent of loeland? as total OX-6
portso . Xoreovere. sine Soviet delivriea of coal and wood fell far short
of the amounts pledged,. a balance of more than $7 million was transferred
to the Icelandic account In dollars, in keeping with the terms of the agree
enter Sovetaloslandi? trade during 1947 y afford Ioelnd an
even greater
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`dollar T lane than in 1946; it appears that this result will depend, haw-
ever, on Ic?land4s. ability to make agreed deliveries of herring oil to
s ol,smhere ,
The cshigf instrument of Soviet propaganda in Yoela d iaa a
the Coi mist Party; although the Soviet .legation in Reykjavik mintaim
a large staff. It has no information or cultured affairs offices,., The
Iaelandi? Communist Party sought to obstruct riti~;S,h occupation of the Leland
in 1940 and, has since directed its oa paign ?against the acquisition of basses .
by the ? Current C ist tactics are mimed at hindering activities
connection with the operation of,the.Kaflavlk airport, undermining lee-
die confidencce in Y pledges,, and promoting oloeer U6SR=lool?Adie trade
relations with -a view to reducing as for political res o - to?1wad4
economic,. dependence on the Weeto
2.o Great ?itaino British in reete in Iceland are similar to those, of
the US.. The present British Govern t wishes the int ee of a. fr
b
democratic Iceland oriented toward the Western pa ergo The strategic b.
. por?tance of Iael d to British defense a indicated in 1940 Than Briti h
forces occupied the island following the Gormn i.nv.ei?n, of Dammrk., Since
.19419 how?ver0 the Biti. eh, have recognized that the prose .tion of etraa
tegic defenses in Icelmud Is a concern pri rily of the usa .
Present close. British relations with -Iceland are based largely .on trade,;
Great Britain being Iceland's chief source of'supply and market for fish
product,.'., In 1946, Iceland sent 36 percent of Ito exports to the United
re-
Kingdem and "cured there 37 percent of its imported Strong cultural
lations with Iceland are intained threugh BBC broadoaete and. through the
visits of British lecturers to the University,of Reykjavik and to, other
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Ia?l adio schools,, A Britia;3h1oela ,dio society is also very motive in
Reykjavik.
ASSISTANCE ALREADY GIVEM
From the outset of World War II, the i 0ove at ,recd zod the vi l
-
inpor .oe of a.ool d to the stra togio defenses both of the. UX d the
Weatorn Eerraiaa phereo Consacluentiyp,it vas .politically and economically d a-
~irabla to premerve the ifaland a ooono from the, collapse threatened by
tha; cutting off of ito ohi f? markets and sou r cee of supply in auropeo
Expai t'Import Bank'Laan of $l ? dibl ion may t%areftro grated to Iaa:alev in
1a;roh 194?, for the purchase of agricultural dad indu trial auppliem in the
o Only $590,000 of this credit was actually used by Iceland and the Imm,
was retirad in J 1943. To 'sivo further a oaifat aics? to Ioolandoa econony
a. well as to provide Great Britain with vitally I por a.nt fiah produots to
support its sa rti.> econora 'o tlu US took over in. October 1941 tha purchaa e
of Ioolandio fish exports to the UK, paying for than in dollars which were
charged to itiah account as defonee aid under the i nd-laaas Act. This
arranganont was gradually . for iinated aver 1943, since Which tip tho
has extended no assistance in any form to Iceland; and none is pending..
Until April 1947, however, when the US garrisons were Vithdra from the
island, Iceland oarnod o tenaaivo
liar balances through military expendi-
tures. Iceland has alto benefited through the push ae ~ for. $5,,476,461,
in cash, of surplus properties, including vehicles and. as bar, c! n
originally produced at a cost of 0l3,,8188466,
The dollar a made available, to Ioola d by the port-Impart . B=%k Xoa a
a n4 the British lendc'loaeo .aaarrang t enabled Icela to reocver rapidly
from the diaruption of its export and art trade in the early year; of
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o The British londmleaase arrangement also oontributec, along with earn-
Ingo. rroo US Military expenditures in the ooua-try .and the expansion of
Ic?la nduo exports to the US, to Ieaalleane 8e aooumulaatiaan of dollar assets,
which totaled $44 million at the and of 194 4,,. Iceland his used a portion
of its ovvmlation of dollars timed sterling to finance its relatively oz-
tengii program for the mdernization of fishing a ad agricultural era ,xipment,,
pleat expansion, and. nioipal iaaprovisments. The oountsyvs high war-tie
ree &p-tas of foreign exchange naturally led to expansion of loeela ndv s domestic
16rcaaote circulation -- to an abunda nos of ready money. The intonaified
ae7.4petitiou tor and eoaroitj of labor, and the rise in dwand for consumer
&ovda, are directly traceable to the increase in individual holdings of
kronur and in turn constitute basic factors in the development of loela ndp
present inf1?ation problems .
III. US OBJECTIVES
The US desires to see Iceland maintain a Stable go a?nneaxt,,lit? tr rdm
oriented a cooperative in international natters and sari ?ting with the
support and consent of the peopla.. The democratic tradition is old and
strong in Icel nd; the present nonmC onumint Cove nt looks to the West
and desires continued friendly relations with both the US and the UL It
particularly desires enlarged exports to the US, which has. remained an im-
portant source Of Supply of industrial and agricultural goods a The stability
of the present rather shaky eoal.iticm cabinet would be threatened by
serious economic orisie. but there is little danger at
present that an eeZc
tromist political group would attempt to seise power. The Ce mate
not strong enough to attempt + eoupg nor would the temper of the people per=
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Bit it; but this party might be able to return to the govern nt in a
coalition with no or two of the other parties and therein receive *on-
cessions to its point of vie' with eventuaaai damage to our general objet"
tiveso
Bo Spcacif'i,o
Under the ter of the Iceland Airport Agreement of October 7. 2946,9
the Ioclae3ndio Cover nt may cancel the landing rights granted to the US
Because of t he_ . rategic importance of Iceland as a
.after a period of 1 and one halt yeemti
tential naval and air base the US considers Iceland, to be vital,to_.its~security.J
t he specifio objective of the US is to rear pea Bent the present tem.
poraaarY Arraangemei td or an ezpanded one,, but to' deny the same to ony unfriendly
p=erc It ir, therefore desired to inewe preservation of Awario&Q.0 long'
gee a trategio it rested
.Ivo $(mi DENATioN OF ALTER ATivE wFANs op RI AgRINN OBaCTIt
T ne ceeuaation of dollar ear mange from the expenditure of t7S militae ry
garri rona in Iceland, together with the extensive Icelaandio expenditures
for capital equipment awed oonsueeerae 4 goods from the US and tJE, have nearly
exhausted Iaelamdoo foreign exchange reeaerveas. The immediate concern of the
U19, therefore In to prevent Ioola nd a already weakened foreign ezohaange
and export marketing position from deteriorating to a point where it might
Impose a euddong rather than gradual, reduction in the populatiotiOn standard
of 1 ie ing,.a.nd, consequently, engender a serious economic crisis which would
threaten political stability,. There are several alternatives for making
additional dollars available to lcelands
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(1) An arrangement by which OMB would purchase Icelandic fish for
consumption In the US occupation cone in, Carmsnnya with 1mma+diatea ttt.,
in whole or in part., in dollars. In addition to furnishing Iceland with
dollar exchangep, an agreement along these lines would enable Iceland to
market certain types of fish, the outlet for which has contracted con-
siderably since the war. Obstacles to such en. arrengemente however, are
(1) the high price of fish generally and of wet salt fish in particular.
for which the Government in D ec ember 1946 guaranteed a minimum price.of 17
cents per pound in the expectation of large sales to the USSR which did not
nterializa; (2) the low caloric content of fish; and (3) the reluctance of
O LGUS to increase its occupation poets through agreements of this type0.. The
Icelandic Government has recently declared itself willing to sell wet salted
fish at 125 cents per pounds. and to bear as a subsidy the difference between
that price end .tho 17 cant minimum it must pay toprcduceera.
(2) Purchase of Icelandic fiash corder US relief program. Greecee9 ilong
with ltalys was an important prewar market for inexpensive Icelandic dry
swlt fish. Thus., purchase of Icolendia fish under the US relief program
wound assist in returning Icelandic trader to its prewar pattern as well
as furnishing dollar exchange.-:Such an arrangement., however., would have to
be studied in connection with the over-all needs of Greece; moreovera the
objections that may exist to OMMS purchase of Icelandic fish for Geraany
my be equally applicable to fish purchmses for Gr eoeo
(3) Enocurngezn of increased exports to the US0 Icelandic exports -
of fish and fish products to the US (consisting mainly of cod liver oil and
frozen cod fillets) mounted to $5,902,500 or 13 percent of Icela ndaa
total. exports in l946, e s compored with $3,900?000 or 10 percent in 19450
It is bolieved that. Ioelaandio sales on the US market,, particularly of
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' aVr b9iaacsar s is
frozen fillets, could 'be considerably increased despite prevailing high
prices of Icelandic fish and the operation of the US tariff. Such ?a do-
velopm ent is highly desirable not only groat'this point of view of Icelandis
present dollar position 'but also from the long"range view point of our
political and economic relations with loelando This development is being
retarded at present'. however, either beoausas of the lack of diligence on
the part of the Icelandic trade representative in the US er because the
Icelandic relieaca on state trading is a hindrance to sales to US private
importers.
(4) US credits. In the jai'ent that ir4port restrictions imposed by the
Ic?leadio Govarvmant and dollar rcceiptim from favorable trade balanaeaa
arc insufficient to halt the excessive drain on Iceland" s foreign exchange
reverves,9 as seems likely, it may be desirable for the US to extend credits
to Iceland for the purchase or the foodstuffs and merchandise required to
prevent 'a sudden drop in Iaela odic living -stendardso
(6) Credits from the World ,' arak sad International Vonota 7 Funds
Since Icelandic needs will be fu r? eonsusrs' goods rather than productive
capital equipmsento it does not appear that Iceland would be eligible for
a World wank anti Icelmd =,uld be eligible for assistance from the
International Monetary lid; since the Icelandic contribution to. the Fund
is smalls ho v ra this aaeriiataana? would be extremely limmiteed).
(6) Free convsa abili. ofaurreancy of Southern , Free convert?
ability of Southern European currencies would enable Iceland 'to obtain
needed dollars from trade w'.th that region instead of the unusable soft
currencies now obtainable. AU exports could then bet used to pay for imports
and. thu a . help to cushion the Lmvitablo decline in Ioal .ndio employ
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end the standard of livtnga
W, Political
Consistent with our nounoed principles for internatiosa conduct ai
our role in the UN,, we oan'only aahia a our general and specific objectives
through economic assistance, friendly centimsnto and gentle persuasion. 'A
stable cacaonoa q maintaining if not gradually expending the standard of
living, popular contact with Amarioansp American institutions .idea, and
cultural development, end .a genuine interest in Iceland and Icelandic. problems
will tend to create a state of popular receptivity to American desires,
The United ,taus presently has no information or cultural program
appears
in Iceland, the wartime USIS program having been discontinued. It taa gm
should be Pursued t
that a modest but minim= program include one full-time, cultural
attache., reconstitution arA eenlaarg ent of the old USIS library. improved
z etvs service to the Icelandic newspapers, and visits by Sri can lecturers
who are reccgnizcd authorities in their fisldfoo -The same opportunity could
profitably be extended to competent Icelaeadio acsholaras to lecture in American
uni ersitieso It. is particularly important to cultivate the. good will and
understanding of the Icelandic University group because of the persuasive role
that its ambers play in the thinking of their countrymono.. The University
is a focal point of intense nationalism, of Communist sentiment among oerm
twin intellectuals, and thus frequently a center of antia rioan sentimnto
The inf orm atioza; program a nvisageed would have the following objectives a
(1) To explain .the aims and mthods of the US in its program to speed
reconstruction and to assure the return of political stability in Europe;
because, the Icelendia character includes a strong done of cynicism as well
as intej.: ie natioraliemo the people are generally responsive only to on
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intelligent prrsezricati6n of facts*
(2) To Counteract both loaitlamdi;ase Communlat and Soviet propaganda
through t dissemination at factual wladgo aabout the United Staten,. In
via of rioan long-term stra .tegio interest in Iceland and than continued
use of Keflavik Airport, it is particularly Important to stream ra sapcat for
Iaol eio Independence and fivedom.,
(3) To a phaas:&za Amarloals continued interoat in and support of intern
ational ooe peratioia,. including respect for the rights of Fall nation
(4) To imp=rove the flow of daily inforamtion but the United States
into Ioa1andi e oa raial n 1em promote 'ae exchange of artiotio,
profossiozal; and as3oiontifio n and intern tiona and pro de through as
con .niently located library, directed by an l ricaaawbor?u Ioe1aandiomopaacng
librs .n, a oentar for basic ref ranoe mr a ns pmpas?o, and current
partodioa ,s,
Co. Inter .tioz al Organizations
IIaader paeaent world conditions, the. United )Taatione should not be re=
g :rdod as a fully alternative aszeaa for the rachjevemant of United States!
opaciflo abjootivs in Icel do Even if the.praatiga end . authority of Uff
in world aZfaira beta firmly ea?taabliEih d, it Is believed that the looland
t varnwnt would be ca tr ly reluctant to sate peace-tiea bases available
to the UK for Saaurity Council garrisoning with troops composed of. bier ie
conti ngenta o Therefore this ra iins an i apr?baable alternative to permanent
baosss on the Island.-
United Staten ? influence in Iceland may also be' promoted through oo-
operation with the Icel iea delegation. In United Nations. rioa .aisle=
gotaaa to UN assist the Icelandiaa del?gation to secure committee appoint=
mate, encourage it to gig full eaip>i?easion to Ioelandaa views as as repro.
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eentativo of the small aationee d acquaint it through peraonal contact
with the reasons for the American point of view on various international
quectipns0
Iceland is a member 'of the United Nations and of all the specialised
agenoies, except UNESCO and Oo Because of the importance of maintaining
cultural ties with the rest of the worlds Icelandic membership in UNESCO
might be encouraged:,
The achievement of United States a general objectives as regards
Iceland resins oiosely connected to the degree of prosperity on the
Europe= Continent, the logical: outlet for Icelandic fish. Iceland will
benefit economically and thereby politically. through whatever arrangements
ITO and other .international or ;anigationss9 euoh to FADS. are able to mako
to hasten' the return of prosperity and inoreaead intern tionn1 'trade to
Europe.
11a0 detailed ways in which the econozn a machinery of tha' United
Nations, as well as that at the apeoia i ed agenoies9 might be utilix . ed
in oonneot on with a possible program of aid to Iceland have been set foirth
in Addendum of June 10 to MCC 366,
V .GNITUDE, ?&T URN, 1D TIMING OF TEE Y SUHES 'REQUIRED WITHIN
TO G I SE U JEGT S
loelaai. Vial Probably need help t0, au
the shook of the forthcoming
reduction In ,its . staaidard of livings ,which currently is ooneid?raialy. above
prewar levelco This high standard of living -is reflected in the. fact that
tameable. ino?M)a expressed in. TJS ?aurre aya gaunted to 17 6 million. 1938
end .stood at. the equivalent -of $111 million.. at. the end. of 1946, In. term of l938
deUair> value the 1945 taxable income was approxinately $37 ,millions. or
more than twice that. of 1 9360
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The foreign exchange revenues received from the American and British
garrisons in Iceland during the wars which helped to support the high
stenziard of living., are no longer available. In fact.. Ioslandgs foreign
exchange reserves accumulated during the war are rapidly approaching deple-
tion. Dollar reserves which amounted to $22 million in January 1946 had
declined to $15 million by January 1947; in the same period sterling re-
serves fell to 14,209,;000 (approximately $17 million).
The decline in the pride of certain fish types and products now setting
in is turning the terms of trade against Iceland, so that for the same quan
titcy of exports it should expect to receive a lower quantity of imports corm
pared to the immediate past. Although 1946 exports were the highest on
rooorrd (44~640QO00). due largely to profitable sales of frozen fish and-
herring oil to the USSR, Iceland had an unfavorable trade balance of
4~23a360.00Oo ,large part of this unfavorable balance was incurred by. the
pus phase 6f capital equipment for the modernisation of fishing and agrioul-
tu.ral apparatus; further deliveries on the capital equipment program during
1947 may be expected to produce another unfavorable trade balance for this
year. It is doubttula.however. whether new investment alone can increase
productivity and lower production costs sufficiently to prevent a drastic
decline in Icelandas living standards in the direction of prewar.levelu4
The Icolandio Qovernsent could conceivably introduce by successive
stages financial reform of its own designed to reduce both domestic
costs and export prices, and thus improve the nation's export marketing
positions Strict enforcement of Income and excess profits tax lases (eric
forocaent is now very lax) would yield an increase in Treasury revenue.
Devaluation of Ioelsndos currenoye with prior education of the public to
the necessity for this action, would also help to bring export prices for
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loe1andic fish into line with world markets. With lower labor costs it
would become economic for Ioe1nd to reeua 'large-scale preparation of
dried calted Lich and thus to re-anter markets in Spain, Portugal, Brazil
and Cube. A balanced program of economic reform involving measures of the type
desox bed in the preoeding paragraph would probably h :v to extend over .a
period of years, The US could assist Iceland in the orderly achieve ent
of such reforms either through 3n?aking firoial experts available to the
Government of looland, or through support of. an advisory mission under the
auspices of the International Monetary Funds
In any evvnt,,short-term credits from the US may be necessary,
To prevent a sudden collapse of the living standard and consequent
Political unrest Which Might adversely affect objectives in Iceland,,
it may be neoescary for the US to extend aid to Joel over the next two
over; a -period of two or. three year'
or three yearco It is like~,~ that 62 an opt to foram -of careditep(or
in the 'form of supporting high prioe for the Icelandic Irish catch) would
be (P,deguate to aoaspencata for export income lower' and to cushion .'the shook
of a suddenly lowered standard of living. Icelandic dells an-sets may be
u@od, up by the beginning of 19". To be effective politically, the aeeis-.
tense should be extended before the complete exhaustion of the doll
bal oe outs off loelandio purchases from the US of foodstuffs and indus'=
triaul ode necessary to prevent widespread economic distress.
VI. PROBABLE AVAILABILITY OF ECU?NUMIC AID FFOO EXISTING
..30MCE UNDER PRESE POLXCIES
she Icelandic Go7ernment has n oither requested nor, indicated a. de-
sir o for financial aeuiatnnoo from any source, It i .po a le that fi nes
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dial assistanooD if requested,, might be accorded by the Export,.Import
fink., but Ioolaandys priority might not be high in view of the more ori-
tical nsec of other nationsA . Xoreovar, the present policy of the Ecport.
Import Bank is to grant credit only for development purpososn There is
in the form of loans
little prospect of Icelander securing mach assis axe om ror other
European countries. While the l7K might extend orodit9 for the purchase of
industrial goods such as textiles, the British probably could not supply
foodst-Affss, which form an important part of Ioelandas imports. Iceland is
eligible to receive f250,000 annually from the International Monetary Fund;
theme sump, howrv arD would be inadequate for Ioelrnd4 s heeds.
VII. ADDITIur&L 1E SURES REQUIRED' PROM T1 UNITED STATES
There are no Treasures other than those cited In IV and V that would
constitute a practical contribution to the attainment of UM objectives
as regards Ioelsnd,.
VillO NiTUOP ARRAN NTS WITH TIM ICEL DIC OOVEEN 1ENT TO
OP U , OB CTIVES 3 .,_
Economic assistance accorded to Iceland by the US would require no
supervision. There in little likelihood that credits would-be utilized
to purchase any but the treat neoeesar r regiirsmentc or that such aid would
be used to maintain an undemocratic group in power. Moreover, any attempt
to recua?e guaarsiitees other than those which ordinarily are included in
credit agreements would be regarded by Icelanders as an infringement of
their independence and oonsequently might have unfavorable political re-
percussions o
lam EFFECTS UPON ICEL6 ND AND UPON US PUP IGN POLICY OP DS
GF~AYv`~ A]l~ ? UURE OF PRaJ tip. ER`
In the event that the Ulm should refuse assistance requested by the
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Icelandic Government, or that the latter's measures for forestalling ,a
euddon deterioration in the countryg a economic situation should fail,,
Iceland would experience a period of temporary economic dislocation and'
distress,, the duration of which would depend generally on the rapidity with
which the European economy `reaco 'eorso Since Iceland depends to . considerable
1 Y!
ourra nt world food shortages living stando~rd& during -this temporary period
might fall somewhat below their prewar levelso
The political effects of such a sudden deterioration in Iceland
eoonomio position would be extremely hisaznful to US. objectives o The sympathy
and good will toward the US of a large section of the population might well
be forfeited. The chief beneficiary would be the Icelandic Coneauaiwt Party,
which would gain added strength in the country as a whole and would exert
a considerably greater influence in the Government, to which it would un-
doubtedly return. In view of such develo manta,, the prospects of seour-
ing c. renewal of the present Iceland Airport Agreement would certainly be
dimmado
Xo PMSIBIE EmGENCY SITUATIU?. WHICH SHOULD BE ANTICIPATED
AND RECWM COURSE OF ACTION FOR THE UNITED STA
The only foreseeable emergency situation which night arise as regards
Iceland is a. pre ,ture deterioration of its eoonoirr precipitated either (1)
by thgi failure or noncimplem3entation of trade pacts negotiated with the
USSR and the UK,, or (2) by strikes In the herring fisheries,, which provide
the backbone of the Icelandic export trade. In such an eventuality,, the
US should seriously-oonsider extending isanediate assistance to Ioelando
In the event the soonomio distress were precipitated by strikes,,- extreme
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T W SECRET W - 21
o axe sahoui be t ern that- the. fi trial a.soao?t noq accorded by the US
not ;iii the impr ion- of ..n' rferixoe in tip' intern 1, oXfci ra. of the
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- -- -- }3,~> t 22
Io AM.LSIS OF THE SITUATION
Iceland emerged from the war unpreosdentedly prosperous and a focal
point of international interest in air atrategy, The war and its after-
math created three baaio stresses: .-(i) an inflated economy requiring ad-
justment to altered postwar condition, (2) the issue of foreign baeea, and
(3) the obstructionism of a strong Costmaaniat movement. Icelandic. alley
gie .oe to democracy continues strong and, although. the people are isolaation-
leto the political orientation remains generally pro-Western.
1o Econnomi situation, Iceland lima b r the export of fish while im-
parting food, raw ateriala, and raasnufaotvreao War profits from fish sales
and garrison expenditures brought prosperity and built up reserves of dollars
and sterling that are presently being expanded for modeirraization of the fish-
ing industry and of agriculture,
Icol?andg a basic economic problem arises out of inflated production
costs in the face of falling world prices for fish and renewed oompeti'
tion from other producers. purtherrre,- the normal prewar markets in southern
] drops -and Germany are unable to pay for Icelandic fish either with hard
money or with the goods Iceland needs. Aa artificial wartime markets have
largely disappeared, a reduction in thy- standard of living must follow.
Foreiff! Eases. History has intensified the sentiments of isola-
tion and nationalism in Iceland. Therefore the people have reacted un-
favorably to their iaslandga new role as a target of strategic competition,
Coimuniat exploitation of this sentiment was largely responsible for pre-
venting the US from obtaining loWterm bane rights in the fall of 19450
A short term agreement signed October 7D 1946 gave the US lauding rights
at Keflavik Airport for a minimum period of 619 years. In protest the
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W TOP SECRET W 23
Communicte resigned from the Cabinet and procipitated the fall of the
Cove aonto A now governmeanta from whioh the Cemmuniete are exoludede
hat -sines been for d-
.3o The Communist Movemanta Coinuniet strength has mined roughly
=xohannged efnce 1942 at 20 percent of the popular vote and 10 seats 'iii
a Parliament of 52 mamboore, Support of workers? Wage demands -and exploi-
tation of the foreign troops issue explain Communist wartime growth, The
party?e influence is disproportionate to its voting strength because of its
domina.4t position in the labor movement -end its ability to exploit other
parties o differences o A member of the coalition Qoverr ent' from 1944 to
1946 f, the Communist Party in now attempting to win read nri asionn to the
ovnri nt by both parliamentary means and the use of the strike weapon,
Rc Tho Stef zson Govern nt
The present Govern mat, headed by a Social Damcrat and supported
by the Conserwtive (burin +es interests) and progressives (far mars and
oooperatives)9, in a desirable combination for US interests. Its, future
depwade primarily upon solution of the, problems caused by inflation and oonn
trading foreign markets.. -The Government is faced by the fact that theIccelaandie standard of living in bound to fall. A sudden economic depression
or eT.aooeseful Communist-led strikes for general wage increases would pro-'
hably topple the Government.
Ca Objectives. and Methods of Other Great Powers
I. USSR. The Soviet Unafon?e strat?gio objectives in Iceland are:
(1) to deny use of the island to the Western Powers as a defense base, and
(2) to-promote closer Soviet-Iceland trade and cultural relationsa Prao-
tioally without commercial interest in Icels before the war., Russia took
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W TOP SECRET W ' 24
19?8 percent of the islWid's total exports in 1946 and desires expanded
tra4d? for 1947. The Co zuaxist Party wins Russia's main propaganda i:nstru-
mont, iin Iceland,
2, Great Britain. British interests in Iceland are similar to those
of the BS, Close commercial relations prevail with treat Britain,, which
receives and provides slightly over one-third of IoelandQ a exports and and in-
ports respectivelye,
Ho A!JYSIS OF THE ASSISTAME ALRF. DY GIVEN
Out of regard to our own strategic interests the US Government in 1940
aided the war belea.guored I061andic eoonony with a $1 million Export-Import
Bank Loan, In October 1941' under a lend-lease arrangement., the US under-
took to payn dollars for Icelandic fish exports to the UK. Other than
.the sale for awash of surplus property and the expenditures of the American
garrison,, the US has provided no assistance sine the end of 1943o
The wartime accumulation of foreign exchange made possible the purchase
of-capital equipsente but also contributed to Ioelasandgs inflation by pro-
viding the basis for expanded bank note circulation.
III, UfS0 OBJECTIV
t>eaae ?a11yA the US desires to see Iceland maintain as stable, West, rdm
oriented government, cooperative in international matters, and'oxisting
with the support and ooneent.of the, people. The present friendly Governor
meat roots upon an insecure political foundation. that can be destroyed by
a sudden economic -orisiso.
because of Iceland's in
~
Sp?c~ caaioai 1~1y
)ortance as a potential naval and air base,
desires to make permanent a n-7
erxcsluaivaa its
present, or expanded, base rights,
We CONSIDERATION OF ALTERNATIVE *AM OF REACHING OBJECTIVES
Ao Economic
foreign exchaange resources are nearing, exhaustion,, Thm US
qr.ru"a+
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w
TOP
problems therefore., is to prevent economic deterioration to the point where
n ?sudden rather than a gradual reduction in the standard of living would
oausw a political crieis. The following alternative mans exist for
making dollaare available to Iceland: (1) Purchase by OUGUS of Icelandic
fish for the German civilian population; (2) purchase of Icelandic fish
under US relief programs; (3) encouragement of increased exporte'to the
US; (4) US oredite;-(5) oredita from the World Bank and International
'Monetary Fund; or (6) eatablialmaent of free convertibility of the ourren-
cier of southern Rurope
S1 Political
Besides measures of economic assistance,'the US must ralyyon.gentle
parsuaaeion, exhibition of official empathy for Ioelandus problem, and
popular contact between Icelanders and Americams in order to create, reoep-
tivity to arican desires,
The United Statee presently has no. information or cultural program
in Iceland.. A modest minimum program w~ tone cultural attache,
a library, improved news services to the Icelandic newspapers, and ex-
change of American and Icelandic eoholerso The Icelandic university
group Is of particular importance to. the US because of the local preatige
of its members and their current, frequently anti-American slant of the
radical element among them., An information progre should be designed to
explain ,erica and American alma while countering soviet propaganda-.,
Oo International Organisation
The UN cannot be a fully alternative means for the reaalieaatiom of our
&pooifio objectives in Iceland., The Icelandic Government would probably
object to the presence on Its territory of Security Council troops of What-
ever nationality.,
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TOP SECT W 26
The US delegation 'to the LJ can prondto general aim by coopera-
tion with and aseietance to the Iaelandio deiegationo Ioel:arAv s member'
chip in UMM;SCO should also be e.acour?agedm
Any arrangements ITO and other inter ational or nieation.e can make
for the ret n of prosperitxy and stability to mope will benefit.Io lend
both eo6nomioal?y and politloally qnd thereby pro to US general ob jeo'
tives9
D , N&iTUR, .P3j D TIMING OF T ME&STTRESq~aEgTII } WITHIN
V. TIE
idfia 1H.4:4F3.1S/d:A AE~ r9.,L Pi:u LV L'113E7. d.i 17J~A6'L~IIgQl.4Vd.& ~M
,Ioelasaud is not in a position to Maintain its present standard of liv'
Ingo now coneiderably above that of 193c3o Although 19 c a a re
Cord export
arIcolarrde a dollar reeervoe alon?, fell from x,.22 million to $13 million
during -U3 year,),,. Thodsoiine in .the price of fish . a d: as Idiitio l .paymente
for, UGW capital equipment in-19A 6 `.X11 again mlocw. m wnfa-rorable baianoe
of trade and .continued depbatiosaQf Iaelandgs?-for eign e:toha nge reserves.
Ioelaud carte therefore import. fewor convu tion.goods.a d. its standard of
living, mu.st declined
tor. e.. effective t oolleption plus. depreciation gf the currencyy,
.
would help rre? uo oosts and the reby improve loOllax u s world aoiqpotitivt
poeitiono US financial expertz oculdasoist. in carX7y ng oust eaonorriio
refer via, but these vrould htavia to be' und?rtet:en In a sce -6ni e?tf gee extend-
ing over a perisid-of yoear@;;
To be effective U ai ehculd pr.'ecr de are anticipated aeriouari c~oono nio
orita9 o 1. ng
oushiou L .sok . Ofe sudde 1y 1 tad a trundard of ti,V. are .
over a.period of, two. or three years..
credit of $26 o oh 10 u:-: n try to f .port g high
pr'icee for loelandic iah 6xports, id r ;sor-wedudeado
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TO GRANT AID OR FAILURE OF PROGRAM UNDERTAKEN
EIS FECTS UPON ICELAND A UPON TJ?+L O FOREIGN FOLICY OF U o S O_ REFUSAL
A period of temporary economic dislocation and distress will result
Vl0 -FROBABLE AVAILABILITY OF ECONOUIC ?AID FROM EXISTING SOURCES UNDER
` F'RESk~~A POL CAS
Fcv:kr d has little oppor ity to 'amoure loans from other goner nts
or? international agenoles, taut. neither has it indicated a need for` such aid,
VIZO ADDITIONAL PAEASU ES REQUIRED FRuM THE UNITED STATES
Na ns. other than those previously cited.
VIIIO V ATM OF ARRANGE N WITH THE ICELANDIC DOVER :NT TO SECURE ACCOMM
Su r, iaion of any economic mosistance granted to Iceland is believed
to be unaboessary to insure mound use of the funds, and politically inadvisable,,
if the Ioolendic Covorn nt4 s p1s for preventing sudden economi -deteriora-
Lion faU0 or if in such ease the US should refuse to grant. assistance.
The' roau.l is would be extremely harmful to U general and specific. ob jeo-
tiveS somad beneficial only to the Communist Party.
L. POSSIBLE F RQENCY SITUATION' WHICH SHOULD BE ANTICIPATED AND RE
COMMENDED? C(XJRSE OF ACTION FOR THE UNITED STATES
US, should seriously consider granting imm9diate assist ao
There are only to foreseeable a rgenoiese, '(1) .failure of the
pond;ing trade pacts with the USSR or the UK; (2) a strike in the vital
and extr oly valuable herring fisheries0 Should either. develop the
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