Helmut Schmidt was born in Hamburg, as son of two teachers. He studied at Hamburg Lichtwark school, graduating in 1937. He was conscripted into military service and began serving with an anti-aircraft battery at Vegesack near Bremen during World War II. After brief service on the eastern front he returned to Germany in 1942 to work as a trainer and advisor at the Reichsluftfahrtministerium. Also in 1942, on 27 June, he married his childhood sweetheart Hannelore "Loki" Glaser, with whom he fathered two children: Helmut Walter (26 June 1944–February 1945, died of meningitis), and Susanne (b. 1947), who works in London for Bloomberg Television. Toward the end of the war, from December 1944 onwards, he served as Oberleutnant in the artillery on the western front. He was captured by the British in April 1945 on Lüneburg Heath and was a prisoner of war until August. During his service in World War II Schmidt was awarded the Iron Cross.

Schmidt's father was the illegitimate son of a Jewish businessman, although this was kept secret in the family. This was confirmed publicly by Helmut Schmidt in 1984, after Valéry Giscard d'Estaing had, apparently with Schmidt's assent, revealed the fact to journalists. Schmidt himself is a non-practicing Lutheran.

Schmidt completed his education in Hamburg, studying economics and political science. He graduated in 1949.

Schmidt had joined the Social Democratic Party (SPD) in 1946, and from 1947 to 1948 was leader of the Sozialistischer Deutscher Studentenbund, the then-student organisation of the SPD.

Upon leaving the university, he worked for the government of the city-state of Hamburg, working in the department of economic policy. Beginning in 1952, under Karl Schiller, he was a senior figure in the Behörde für Wirtschaft und Verkehr (the Hamburg State Ministry for Economy and Transport).

He was elected to the Bundestag in 1953, and in 1957 he became member of the SPD parliamentary party executive. A vocal critic of conservative government policy, his outspoken rhetoric in parliament earned him the nick-name "Schmidt-Schnauze". In 1958, he joined the national board of the SPD (Bundesvorstand) and campaigned against nuclear weapons and the equipping of the Bundeswehr with such devices. In 1958, he gave up his seat in parliament to concentrate on his tasks in Hamburg.

From 27 February 1958, to 29 November 1961, he was a Member of the European Parliament, which was not directly elected at the time.

The government of the city-state of Hamburg is known as the Senate, and from 1961 to 1965 Schmidt was the Innensenator, that is Minister of the Interior. He gained the reputation as a Macher (doer) – someone who gets things done regardless of obstacles – by his effective management during the emergency caused by the 1962 flood. Schmidt used all means at his disposal to alleviate the situation, even when that meant overstepping his legal authority, including federal police and army units (ignoring the German constitution's prohibition on using the army for "internal affairs"; a clause excluding disasters was not added until 1968). Describing his actions, Schmidt said, "I have not been put in charge of these units; I have taken charge of them!"

This characteristic was coupled with a pragmatic attitude and opposition to political idealism, including those of student protests, best symbolised by his well known remark that "People who have a vision should go see a doctor."

In 1965, he was re-elected to the Bundestag. In 1967, after the formation of the Grand Coalition between SPD and CDU, he became chairman of the Social Democrat parliamentary party, a post he held until the elections of 1969.