In this satire of the Nazis the stooges are paperhangers in the country of Moronica. When evil cabinet ministers overthrow the king, they decide to make Moe the new ruler as he'll be stupid enough to follow their orders. Moe becomes Dictator, Curly is a Field Marshal and Larry becomes Minister of propaganda. After successfully preventing a female spy from committing mayhem, the boys are run out of office by a mob and eaten by lions.
In the fictional country of Moronika, three munitions manufacturers—Messrs. Ixnay (Richard Fiske), Onay (Dick Curtis) and Amscray (Don Beddoe)—decide their country is in need of a change. They decide to implement a dictatorship, oust the king, 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 presents Moe Hailstone, Curly Gallstone, and Larry Pebble with the offer to run Moronika. Moe is instituted as the leader (the Adolf Hitler role), with Curly as Field Marshal "Gallstone" (representing Hermann Goring 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 suspect she is a spy after and attempt a failed execution of her.
Larry then cuts a round table while a dancer arrives and tells them the delegates have arrived for the round table meeting. The meeting goes wrong when Curly knocks the first two delegates unconscious. Later the kings daughter gathers a huge mob to storm Hailstones palace. The trio quickly abdicate, inadvertently flee into a lions den, and are eaten.
The film 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.
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.