The short begins with a title card disclaimer that reads: "Any resemblance between the characters in this picture and any persons, living or dead, is a miracle."
In the fictional country of Moronika, three munitions manufacturers — Messrs. Ixnay (Richard Fiske), Onay (Dick Curtis), and Amscray (Don Beddoe) — are upset over their lack of profits due to the country's king, Herman the Sixth and Seven-Eights, pursuing a policy of peace instead of war. They decide to oust the king, implement a dictatorship, and go about finding someone stupid enough to be a figurehead leader. Ixnay volunteers the three wallpaper hangers simultaneously working in his dining room: The Stooges.
Ixnay, Onay, and Amscray meet with Moe Hailstone, Curly Gallstone, and Larry Pebble and tell them of their offer to run Moronika. Moe is instituted as the leader (the Adolf Hitler role), with Curly as Field Marshal "Gallstone" (representing Hermann Göring while also mimicking Benito Mussolini), and Larry as Minister of Propaganda Pebble (a representation of Joseph Goebbels). After his takeover, Hailstone proceeds to give a speech to the masses, cueing Larry to display signs reading "CHEERS", "APPLAUSE", and, accidentally, "HISS".
However, the daughter (Lorna Gray) of the overthrown king pays Hailstone a visit, going by the name Mattie Herring (a spoof of World War I spy Mata Hari). The Stooges eventually suspect her of being a spy, and sentence her to execution, but she escapes.
Larry then saws the corners off a square table to be ready for a round-table meeting. A ballerina enters and tells them the delegates have arrived. In the meeting, Moe tells the delegates that his country Moronika demands more land concessions from its neighbors, leading the delegates to start arguing with him. Curly manages to silence the delegates by knocking them out with golf balls. But after the meeting, a large mob led by the king and Mattie Herring advance on the palace. The trio quickly abdicate, inadvertently flee into a lion's den, and are eaten. The film ends with the lions wearing articles of the trio's clothing and one of them burping.
You Nazty Spy! satirized the Nazis and the Third Reich and helped publicize the Nazi threat in a period when the United States was still neutral about World War II, and isolationist sentiment was prevalent among the public. During this period, isolationist senators such as Burton Wheeler and Gerald Nye objected to Hollywood films on grounds that they were anti-Nazi propaganda vehicles designed to mobilize the American public for war. According to the Internet Movie Database, You Nazty Spy! was the first Hollywood film to spoof Hitler. It was released nine months before the Charlie Chaplin film The Great Dictator, which began filming in September 1939. You Nazty Spy! was filmed on December 5-9, 1939.
The Hays code discouraged or prohibited many types of political and satirical messages in films, requiring that the history and prominent people of other countries must be portrayed "fairly". Short films such as those released by the Stooges were subject to less attention than feature films.