In the fictional country of Moronica, three munitions manufacturers—Messrs. Ixnay (Richard Fiske), Ohnay (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 Moronica. Moe is instituted as the leader (the Adolf Hitler role), with Curly as Field Marshal Gallstone (a representation of Hermann Göring), and Larry as Minister of Propaganda Pebble (an amalgam of Joseph Goebbels and Joachim von Ribbentrop). After his takeover, Hailstone proceeds to give a speech to the masses, cueing Larry to display signs reading "APPLAUSE", "CHEERS" and even "HISS". Moe "bonks" Larry after Larry accidentally raises the cue card for "HISS" at the wrong time during one of Hailstone's speeches.
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, and attempt to execute her. She escapes, and gathers a huge mob to storm Hailstone's palace. The trio quickly abdicate, and flee into a lion's den. A Lion is seen exiting wearing Hailstone's peaked cap.
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 more famous Charlie Chaplin film The Great Dictator, which was then in production. Heavy publicity in Hollywood about Chaplin's planned film began to circulate in mid-1939, and may have helped serve as inspiration for the film. Much like the case of Chaplin, Moe Howard's physical resemblance to Hitler (when in makeup) was probably a key source of inspiration.
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"; but short subjects may have been subject to less attention than feature films.
Another notable feature of You Nazty Spy! was the fact that it was implying business interests were behind the Nazi rise to power. This is probably reflective of a common belief among some Americans about the Nazis at the time, possibly from the involvement of Reichsbank president Hjalmar Schacht, among other leaders of German industry, in the pre-World War II years of the Third Reich.