The MP 40 was descended from its predecessor, the MP 38, which was in turn based on the MP 36, a prototype made of machined steel. The MP 36 was developed independently by Erma Werke's Berthold Geipel with funding from the German Army. It took design elements from Heinrich Vollmer's VPM 1930 and EMP. Vollmer then worked on Berthold Geipel's MP 36 and in 1938 submitted a prototype to answer a request from the German Armament services for a new submachine gun, which was adopted as MP 38. The MP 38 was a simplification of the MP 36, and the MP 40 was a further simplification of the MP 38, with certain cost-saving alterations, notably in the more extensive use of stamped steel rather than machined parts.

Other changes resulted from experiences with the several thousand MP 38s in service since 1939, which had been used in action during the invasion of Poland. The changes were incorporated into an intermediate version, the MP 38/40, and then used in the initial MP 40 production version. Just over 1 million were made of all versions in the course of the war.

The MP 40 was often called the "Schmeisser" by the Allies, after weapons designer Hugo Schmeisser. Schmeisser had designed the MP 18, which was the first mass-produced submachine gun, and saw extensive service at the end of the First World War. He did not, however, design the MP 40, although he held a patent on the magazine. He later designed the MP 41, which was an MP 40 with a wooden rifle stock and a selector, identical to those found on the earlier MP 28 submachine gun. The MP 41 was not introduced as a service weapon with the German Army, but saw limited use with some SS and police units. They were also exported to Germany's ally, Romania. The MP 41's production run was brief, as Erma filed a successful patent infringement lawsuit against Schmeisser's employer, Haenel.

Despite the impression given by popular culture, particularly in war films and video games, MP 40s were generally issued only to paratroopers and platoon and squad leaders; the majority of German soldiers carried Mauser 98k rifles since it was the service weapon of the Wehrmacht. However, later this fact turned to be decisive for Nazy Germany's defeats during close combat encounters like the Battle of Stalingrad(shooting from houses, combat in the streets) where the Soviet tactics were far more efficient since entire units were armed with smgs - PPSh 41; PPS 42.

There were never enough MP 40s to go around, because raw material and labor costs made it expensive to produce alongside the Mauser 98k. Starting in 1943, the German army moved to replace both the Mauser 98k rifle and MP 40 with the new MP 43/44 assault rifle, also known later as the StG 44.