An oppressive reformatory is reformed by a politically appointed racketeer.
A gang of kids collects quarters for watching cars or they flatten the tires. Jimmy (Frankie Darro) hits a man in the store they are robbing. After Judge Gilbert (Arthur Byron) questions their parents, six boys are sent to the reformatory. The nurse Dorothy Griffith (Madge Evans) tells Thompson (Dudley Digges) that Johnny Stone (Raymond Borzage) should be in a hospital. Patsy Gargan (James Cagney) arrives with Mike (Allen Jenkins) and a girlfriend, drinking out of a flask. Gargan has been appointed deputy commissioner as a political reward, and he asks Thompson to do his reports for him. Jimmy is brought in for fighting, and Thompson hits him. Jimmy runs out and climbs the barbed wire. Gargan agrees with Dorothy and over-rules Thompson by sending Jimmy to the infirmary. Dorothy tells Gargan the reform school is not what it should be and suggests self-government. When Gargan gets fresh, Dorothy slaps him and walks out. Gargan tells Louie to get the governor to let him run the reformatory. Gargan tells his gang he will be busy but to keep making the collections.
Gargan tells Thompson not to hit the kids and then sends him on vacation for a month. Gargan ends the regimentation except that the boys have to wash before eating. The food is improved. He explains the self-governing republic with a store. He and Dorothy hold elections, and she stops a fight by nominating one tough kid for chief of police and declaring Jimmy elected mayor. Gargan fires all the guards. Thompson returns and gets his informer Charlie (George Offerman) to plan an escape with Jimmy. At the same time Pete is being tried for stealing a chocolate bar from the store. Gargan discovers Charlie and Jimmy leaving, offers them some money and wishes them luck. Thompson finds their uniforms and complains to Gargan; but they come back. Gargan questions Jimmy, who draws a sketch. Dorothy kisses Gargan. Mike calls Gargan and tells him that he and Louis are frozen out of the rackets. Gargan confronts Joe for taking over the rackets; they fight, and Joe is shot with his own gun. Gargan has to flee and hide out. He calls Thompson and tells him no changes unless Dorothy approves.
Thompson finds out about Gargan and makes up for lost time. Dorothy says it is worse than ever, and Thompson fires her. Jimmy and the boys plead with Thompson and then steal food. Charlie informs on coughing Johnny Stone, who is put in the cooler and dies. The boys go after Thompson, capture guards and guns, and put Thompson on trial for murder. Dorothy tells Gargan about the school. Thompson runs away and is chased by the boys, who burn a building with torches. Thompson falls off the roof and dies. Gargan returns, explains why he was gone, and gets them to put out the fire. Judge Gilbert decides the tragedy was Thompson's fault and asks Gargan to run the school. In the final scene Gargan tells Mike to give the rackets to Joe, and then he kisses Dorothy.
This story contrasts authoritarian regimentation with liberal self-government. Although implemented by a corrupt racketeer, the enlightened nurse's humanitarian reforms stimulate him to change too. It shows how little and big gangsters can be educated by humane treatment to learn democratic methods that result in more justice for everyone.