The formation of the Socialist Party was a result of the Popular Front line embraced by ComIntern, and promoted in Iceland by Einar Olgeirsson of the KFI.

Philosopher Jon Olafsson has argued that as it resulted in a split within the larger Social Democratic Party, Comintern did not approve of the merger in its eventual form.

In 1939, the chairmanship was taken over by Einar Olgeirsson, after the previous non-communist chairman had left the party in protest against the refusal of his new allies to condemn the attack by the USSR on Finland in the Winter War.

The coalition broke down on the issue of the claims of the United States to have a military base in Keflavík, which the socialists opposed.

In 1956, the Socialist Party took part in the People's Alliance along with the Egalitarian Society and Hannibal Valdimarsson.