Flatey and its surrounding islands are, as a creation, believed to have forged from under the weight of a great glacier during the previous Ice age.

[citation needed] In spite of this, Flatey used to be one of the main cultural centres of Iceland, with its no-longer existing monastery (founded in 1172) standing on the highest point of the island as its beacon of knowledge.

In the middle of the 19th century, Flatey was still a cultural and artistic centre but doubled as a hub of commerce for the northwest, having received its town charter from the Danish crown in 1777.

[citation needed] Due to social change and changes of production and ensuing change of values and demands in the work place, its steady population has dwindled down to the minimum needed to support the community on a regular basis, a community which, during summer and holidays, multiplies in size due to a massive influx of second home owners, regular domestic visitors and foreign tourists.

[citation needed] Besides sheep, most of Flatey's natural life consists of various kinds of mostly migratory birds, especially the puffin.