In the decades leading up to World War I, Iceland experienced a period of prosperity, but the war brought significant challenges. As part of neutral Denmark, Iceland was not directly involved in the conflict, yet it suffered economic hardships. The island became more isolated, leading to a steep decline in living standards, a heavily indebted treasury, and food shortages that raised fears of famine. Although Icelanders were generally sympathetic to the Allies, trading ties with the United Kingdom—within whose sphere of influence Iceland found itself—became strained. The British imposed restrictions on Icelandic exports to prevent indirect trade with Germany, adding economic burdens.
Although there was no evidence of German plans to invade Iceland, the war impacted Icelandic society in other ways. More than 1,200 Icelandic men and women, including many of Icelandic descent living in North America, fought for the Allies. A total of 144 died, many of them Iceland-born.
The war highlighted Iceland's growing ability to govern its own affairs. Iceland’s efficient handling of internal issues and foreign relations during the war, despite its isolation from Denmark, demonstrated its capacity for greater independence. This competence played a key role in Denmark’s decision to recognize Iceland as a fully sovereign state under the Danish–Icelandic Act of Union in 1918. The war also had lasting effects on Iceland's economy, leading to long-term government involvement in the marketplace that continued until after World War II. Moreover, the demand for war news helped solidify *Morgunblaðið* as a leading Icelandic newspaper.