The Icelandic Police can trace its origins to 1778, when the first traces of industry started to appear. In the times before that law had been enforced by individuals as allowed by Althing and later by sýslumenn (sheriffs) and other Royal proxies.

The first Icelandic policemen are considered to be the morningstar armed nightwatchmen of Reykjavík who were commissioned primarily to deter prisoners, housed in the Reykjavik prison, from breaking into the Innréttingarnar.

In 1803 the first proper policemen were commissioned in Reykjavík as it became a free town or kaupstaður. The first police chief was Rasmus Frydensberg, the town mayor, who hired two former soldiers, Ole Biørn and Vilhelm Nolte, as the first policemen. It was not until shortly after 1891 that policemen were hired in most of the other areas of Iceland.

In 1933 Alþingi passed the Police Act which provided state participation in financing of police forces. This was done mostly in response to the threat of a communist revolution, whose capabilities had become apparent in violent attempt to force the decisions of the Reykjavik city council, where a large part of the police forces went out of action as a result of physical injury. The act also authorized the Minister of Justice and Ecclesiastical affairs to call out reserves in critical situations.

In 1939 prime minister Hermann Jónasson hired Agnar Kofoed-Hansen as police chief. Agnar had received officer training in the Danish army and proceeded to give the police military training. Considerable amounts of weapons were purchased from abroad as well, including revolvers and sub-machine guns. It was also planned to train the police reserves and thus create some sort of military defence forces, but this was cut short when the United Kingdom invaded Iceland in 1940.