"Iceberg theory" refers to Hemingway’s notion that stories could be made stronger by omitting key pieces of information. In Hemingway’s view, the writer should have a complete understanding of his characters and their motivations, but the story, as written, should include only the surface facts of the action (the "tip of the iceberg"). In this way, he believed, the reader could "fill in the gaps" of his understanding by paying close attention to the events that are described. The "truth" of the writing would necessarily reflect the deeper emotional or psychological qualities of the characters without having to explain them.
One example from Farewell to Arms that illustrates this principle can be found in Chapter 27:
I was always embarrassed by the words sacred, glorious, and sacrifice and the expression in vain...There were many words that you could not stand to hear and finally only the names of places had dignity. Certain numbers were the same way and certain dates and these with the names of the places were all you could say and have them mean anything. Abstract words such as glory, honor, courage, or hallow were obscene beside the concrete names of villages, the numbers of roads, the names of rivers, the numbers of regiments and the dates.
Henry objects to the expression "in vain" because it is an abstraction that tries to refer to the unsaid struggle of the soldiers—it is trying to make the invisible part of the iceberg visible. For Henry and Hemingway, discussing such things does not make them clearer; on the contrary, such words are "obscene"—the sense is, that talking about such things only degrades them.