The film starts in the office of a prison director. Franz Blum (Jürgen Prochnow) has been sent to this prison because he has taken part in robbing a bank. He is 28 years old, comes from a good family, good education, was working in a bank. His work was very well thought of, so that his promotion to some management job later was quite sure. The prison director hopes, that Franz Blum will conduct himself well, so that he can be released early. He also hopes, that the stay in prison will help him realize, that he has done wrong and make him change this wrong course his life has taken.
Franz is locked in by a fellow prisoner, who plays some trick on him. This causes an outbreak of despair. The neighbour from the next cell calls out to Franz and asks him, what is wrong. Franz has got a migraine and can't get any pills against the pain. The neighbour has some and gets them across to Franz. During the next days, Franz Blum learns about life in prison. One of the volunteers, who cleans, advise him to join them, as a way to get out of the cell and to gather brownie points witht the administration. Franz is propositioned by a homosexual, but before he realizes, what is happening, the current boyfriend, a thug called Kuhl shows his jealousy.
The friendly neighbour from the beginning, Bielig, is the exception in this world, like Franz he has had an education and because of being different, he is very much the underdog. During the usual walk in the courtyard, Kuhl, who seems to feared by everybody, including the guards, beats Bielig badly. Everybody, including the guard, pretends not to have seen anything, even Bielig refuses to accuse Kuhl. Only Franz Blum gives a statement about what he has seen. The administration of the prison is very pleased about this, because they have difficulties getting at Kuhl, nobody dares accuse him. Franz is assured of being protected in case Kuhl plans revenge (which he does, of course).
Franz gets a job in the prison workshop and has an opportunity to talk to Bielig. Bielig is an idealistic kind of intellectual, who tried in the beginning to make the prisoners aware of the inhuman conditions, which they themselves make even worse by their lack of solidarity. All this got him, was laughter and being beaten up. He has a heart condition but the prison administartion thinks, he is only pretending and refuses to let him have his medication or to let him go to a proper hospital for a checkup.
Meanwhile Kuhl and his cronies make themselves as comfortable as possible inside the prison.
At the night of Kuhl's birthday party, Bielig starts some commotion and when guards come to inquire, he threatens them with a wooden pistol, that he has built himself. He wants to be taken to the administration to force them to do something about his heart condition. The plan fails, he is overpowered and the whole prison searched for weapons.
Kuhl is to be taken to another tract of the prison because of Franz's statement. On the evening of his good-bye-party with his old cell-mates, they manage to lure Franz into their cell and beat him up. After Kuhl is transferred, Franz is put into the cell with Kuhl's old mates. He has hidden a razor blade and tries to commit suicide.
After this incident, Franz Blum is sent to a prison camp, where he has to cut peat (again!) and sometimes gets very wet. Life is better than in the former prison and the prisoners are even paid a small amount for their work. But the meanness continues. Here also the inmates have organized in groups around some thugs, the most prominent here is one Rosato. The followers "work" for their gang leader and transfer some of the peat, they have cut, to the leader's account with the administration. In exchange they have a certain protection from being tormented. Not even the guards dare to interfere with Rosato and friends. Franz is asked by one of these thugs to join the gang, quite a compliment, but Franz refuses. He tries to fend for himself and only hits back, when provoked.
One night, Franz wakes one of his cell mates, who has a nightmare. They talk for a bit and in the end, the mate offers to work for Franz. This starts Franz on a new career as gang leader. He manages to play the guards against the other gang leaders and starts a trade in goods from outside prison, like coffee or tobacco. Soon Franz is the most successful gang leader in the camp, with lots of followers working form him.
Unluckily, one day Kuhl turns up in the camp and threatens everybody back into his gang. Franz manages to get some sleeping pills from one of the guards, he can blackmail. Franz's last follower helps him get Kuhl to eat some pudding containing the pills. Later in the evening, Franz picks a fight with the doped Kuhl and beats him. All the thugs are deeply impressed and return to Franz, who once again is top dog. The guards know, that he deals with all kinds of things and runs a racket inside the camp, but don't interfere, because he keeps the inmates quiet.
There is some trouble in the camp around the outbreak of a fire and all inmates are sent back to the original prison. Here have meanwhile started the first attempts at a prison-reform. The prisoners are allowed to run their own sports-club as a first trial in self-administration. The first step is to vote for a committee of five people, who will write the statutes for the new club and then elect among themselves the new president.
Franz easily manipulates the prisoners. He is elected into the committee and manages to write the statutes in a way, that will make it even easier for him, to rule the other prisoners and run his business. Of course, he also becomes the president of the sports club. Kuhl, who has to find out, that even some of his followers have voted for Franz, tries to win his followers back, he is still the most feared in prison and although his coffee and tobacco are more expensive than Franz's, he becomes a danger again.
One of Franz's cronies forges a letter, supposedly by Kuhl to his gay friend, anouncing that he is going to flee. This letter is handed to the prison administration. Kuhl is transferred to a high security tract, from which he can't interfere anymore. Franz puts the prices up. The sports-club becomes a great success, not only with the prisoners but also with the administration.
Franz seeks again the friendship of Bielig, his friend from the beginning. But Bielig disapproves of Franz's behaviour and methods. Bielig even refuses to accept the heart medication, that Franz has smuggled into the prison for him. He thinks, that Franz's behaviour is despicable and cynical, he even threatens to denounce Franz with the prison administration but at the very least, he wants the chance to talk to the prisoners to open their eyes.
Franz gives him the opportunity, well knowing, what the reaction will be. After football training, Bielig talks to the men and tries to make them realize, that the sports club has actually made things worse, that Franz is exploiting and ruling them even worse than the prison administration. The prisoners just laugh and force Bielig to take part in a long distance run. His heart gives up and he dies.
Franz is summoned to the prison director and expects to be blamed for Bielig's death. Instead he is again congratulated on the well run sports-club. Bielig's death was a heart attack and nobody's fault. Because Franz has so convincingly shown, that he has changed his life, he is released early.