Iceland may be the Ultima Thule of the ancients. Irish monks visited it before the 9th cent., but abandoned it on the arrival (c.850–875) of Norse settlers, many of whom had fled from the domination of Harold I. The Norse settlements also contained many Irish and Scottish slaves, mainly women. In 930 a general assembly, the Althing, was established near Reykjavík at Thingvellir, and Christianity was introduced c.1000 by the Norwegian Olaf I, although paganism seems to have survived for a time. These events are preserved in the literature of 13th-century Iceland, where Old Norse literature reached its greatest flowering. (Modern Icelandic is virtually the same language as that of the sagas.)
Politically, Iceland became a feudal state, and the bloody civil wars of rival chieftains facilitated Norwegian intervention. The attempt of Snorri Sturluson (1179–1241) to establish the full control of King Haakon IV of Norway over Iceland was a failure; however, Haakon incorporated Iceland into the archdiocese of Trondheim and between 1261 and 1264 obtained acknowledgment of his suzerainty by the Icelanders. Norwegian rule brought order, but high taxes and an imposed judicial system caused much discontent. When, with Norway, Iceland passed (1380) under the Danish crown, the Danes showed even less concern for Icelandic welfare; a national decline (1400–1550) set in. Lutheranism was imposed by force (1539–51) over the opposition of Bishop Jon Aresson; the Reformation brought new intellectual activity.
The 17th and 18th cent. were, in many ways, disastrous for Iceland. English, Spanish, and Algerian pirates raided the coasts and ruined trade; epidemics and volcanic eruptions killed a large part of the population; and the creation (1602) of a private trading company at Copenhagen, with exclusive rights to the Iceland trade, caused economic ruin. The private trade monopoly was at last revoked in 1771 and transferred to the Danish crown, and in 1786 trade with Iceland was opened to all Danish and Norwegian merchants. The exclusion of foreign traders was lifted in 1854.
The 19th cent. brought a rebirth of national culture (see Icelandic literature) and strong agitation for independence. The great leader of this movement was Jón Sigurðsson. The Althing, abolished in 1800, was reestablished in 1843; in 1874 a constitution and limited home rule were granted; and in 1918, Iceland became a sovereign state in personal union with Denmark. The German occupation (1940) of Denmark in World War II gave the Althing an opportunity to assume the king's prerogatives and the control of foreign affairs. Great Britain sent (1940) a military force to defend the island from possible German attack, and this was replaced after 1941 by U.S. forces.
In 1944 an overwhelming majority of Icelanders voted to terminate the union with Denmark; the kingdom of Iceland was proclaimed an independent republic on June 17, 1944. Sveinn Björrnsson was the first president. Iceland was admitted to the United Nations in 1946; it joined in the Marshall Plan and the North Atlantic Treaty Organization. In 1946, Iceland granted the United States the right to use the American-built airport at Keflavík for military as well as commercial planes. Under a 1951 defense pact, U.S. forces were stationed there (the base was closed in 2006). Björnsson was succeeded by Ásgeir Ásgeirsson.
Relations with Great Britain were strained when Iceland, in order to protect its vital fishing industry, extended (1958) the limits of its territorial waters from 4 to 12 nautical miles (7.4–22.2 km). The conflict, which at times led to exchanges of fire between Icelandic coast guard vessels and British destroyers, was resolved in 1961 when Great Britain accepted the new limits. Kristjárn Eldjárn was elected president in 1968 and reelected in 1972 and 1976. Iceland joined the European Free Trade Association in 1970. In 1971 elections the Independence party–Social Democratic party coalition government, which had governed for 12 years, lost its majority, and a leftist coalition came to power.
The dispute with Britain over fishing rights (widely known as the "cod wars") was renewed in 1972 when Iceland unilaterally extended its territorial waters to 50 mi (80 km) offshore and forbade foreign fishing vessels in the new zone. An interim agreement was reached in 1973, whereby the British would limit their annual catch and restrict themselves to certain fishing areas and specified numbers and types of vessels.
In Jan., 1973, the Helgafell volcano on Heimaey island erupted, damaging the town of Vestmannaeyjar. Later in the year Iceland and the United States began revising the 1951 defense pact, with a view toward ending the U.S. military presence.
A split in the ruling coalition over economic policies caused the Althing to be dissolved in 1974; following elections, the Independence party formed a new government. Iceland extended its fishing limits to 200 mi (320 km) in 1975, which, after more skirmishes with Great Britain, was finally recognized in 1976. Vigdís Finnbogadóttir was elected president in 1980, thus becoming the world's first popularly elected female head of state; she was reelected in 1984, 1988, and 1992. Davíð Oddsson, of the conservative Independence party, became prime minister in 1991; his center-right coalition was returned to office in 1995, 1999, and, narrowly, 2003. In 1996, Ólafur Ragnar Grímsson was elected to succeed Finnbogadóttir, who retired as president. The highly popular Grímsson was reappointed to the post by parliament without an election in 2000; he was reelected in 2004, 2008, and 2012.
Oddsson resigned and exchanged posts with coalition partner and foreign minister Halldór Ásgrímsson, of the Progressive party, in Sept., 2004 (Oddsson stepped down as foreign minister a year later). In June, 2006, after the Progressive party suffered losses in local elections, Ásgrímsson resigned as prime minister; he was succeeded in the post by Geir Hilmar Haarde, the foreign minister and a member of the Independence party. The next year, in the May, 2007, parliamentary elections, the Progressives suffered sharp losses and left the ruling coalition; the Independence party formed a new coalition with the center-left Social Democrats; Haarde remained prime minister.
In Oct., 2008, the global financial crisis led to the collapse and government nationalization of Iceland's largest banks, which had taken on enormous debt in order to expand aggressively internationally. Many of the banks' depositors were individuals, companies, organizations, and local governments elsewhere in Europe, and the banks' collapse was aggravated and accelerated when Britain seized their British assets. As a result of the banking crisis, Iceland's currency also dropped sharply in value. The situation stabilized in November when Iceland secured significant loans from the International Monetary Fund and Scandinavian countries, but Iceland experienced a sharp rise in interest rates and unemployment and a sharp drop in housing prices.
In Jan., 2009, the country's severe economic crisis forced the government to resign. An interim center-left minority government, consisting of the Social Democrats and the Left-Green Movement, was formed in February. Jóhanna Sigurðardóttir, a Social Democrat and former social affairs minister, became prime minister; she was Iceland's first woman prime minister and the modern world's first openly gay head of government. Early elections, held in April, resulted in a majority for the ruling center-left coalition.
In June, 2009, the government agreed to a 15-year plan to repay British and Dutch governments for outlays they made to depositors who lost money in Icelandic banks. The Althing narrowly voted in July in favor of applying to join the European Union. Legislation enacted in August concerning repayment terms for the British and Dutch met with objections from them. A new, more stringent law narrowly passed in December, but broad public opposition to it led the president to refuse to sign it and submit it to a referendum (Mar. 2010) in which the voters overwhelmingly rejected it. A less stringent repayment plan was agreed upon in Dec., 2010, and enacted in Feb., 2011, but the president again refused to sign it and a majority of Icelanders rejected it in a referendum (Apr., 2011). Despite these disagreements over repayment, by the end of the 2011 the country had emerged from its financial collapse and begun to grow again economically.
Meanwhile, former prime minister Haarde, who had been accused of negligence by a special investigation into the 2008 banking crisis, was indicted by the Althing in 2010. Some charges were dropped before his 2012 trial, and special court found him not guilty of all charges except that of failing to hold cabinet meetings on the developing crisis; he was not sentenced, and he denounced the verdict as political. In Jan., 2013, the European Free Trade Association Court ruled that Iceland's government was not obligated to provide immediate repayment of the losses of the British and Dutch depositors in the failed Icelandic banks. In the Apr., 2013, elections the Independence and Progressive parties won a majority of the seats, and they subsequently formed a conservative coalition government with Sigmundur Davíð Gunnlaugsson, leader of the Progressives, as prime minister. The new government suspended talks on joining the EU pending a referendum on the issue.