Room 40 became known to the Germans in the interwar period. In the years immediately after the war, a number of memoirs and histories by British commanders made reference to it. Fisher's autobiography, published in 1919, stated that 'it is the elucidation of the cypher which is one of the crowning glories of the Admiralty work in the late war'. The first volume of Churchill's The World Crisis, published in 1923, included a description of the Russian capture of codebooks from the German cruiser Magdeburg, and their use by the British. More damning was a series of leaks in 1925. An American lawyer, Amos Peaslee, had been employed by American companies seeking to track down the German saboteurs behind the 'Black Tom' explosion. Peaslee learned of the existence of German diplomatic decrypts through the American Admiral Sims, which might show that the German government had ordered the sabotage. Peaslee befriended Reginald Hall, the former head of British naval intelligence, and through him got access to Room 40 decrypts. These seem to have been from Hall's private files, rather than an officially sanctioned release of material. Peaslee selected the most relevant messages as evidence, and began crafting a case against the German government. As he was doing so, Walter Page, the American ambassador to Britain during the war, published a magazine article on the Zimmerman Telegram. This article, published in November 1925, contained details of the British decryption of the message which Page had observed; it was likely inspired by knowledge of Peaslee's access to decrypted messages. Page's article led to a series of information releases by the British. Arthur Balfour, First Lord of the Admiralty, openly discussed Room 40 at a lunch at Edinburgh University. In November 1927, the codebreaker Alfred Ewing gave a talk at the same institution which clearly laid out the techniques, work and effect of Room 40. Peaslee's case against the German government was filed in March 1927; this included the deciphered texts. With this evidence in hand, it was clear to the Germans that their codes had been broken.

The German reaction to this was somewhat muddled. They tightened a number of their cipher systems. While they already used the Enigma machine, the release of the Room 40 decrypts seems to have triggered security improvements. The 'plugboard', which greatly increased the complexity of the system, was introduced, and details of the system and future improvements were made fully secret, rather than being open as a commercial product. However, this only applied to the Army's Enigma machines. The Navy continued to use the less secure commerical variant. The German foreign office also tightened security, moving away from book codes and cipher machines to one-time pads. Despite these improvements, there was also a degree of complacency. Many of the British triumphs seemed to come, not from British ingenuity, but from captured documents. Most naval decrpyts came from messages sent in codes which the British had captured - the SKM code from the Magdeburg, the HVB code from a number of merchant ships in Australian waters, and the VB code recovered from the destroyer S-119. This led German security experts to discount the possibility that the British might break their codes. As long as the codebooks, keys and machines were kept safe, there was no chance of the British breaking the codes. This attitude persisted throughout WWII; when the first information on the Allied breaking of the Enigma began to leak out in the 1970s, the head of the German Navy's codebreaking organisation (the B-Dienst) flatly denied that it was possible, believing that the British were not capable of the 'mental work' of it. The declassification of Room 40 did not lead to the Germans setting up their own equivalent. This was because such organisations already existed. The Navy's B-Dienst had been founded in 1919, carrying on the work of the earlier Nachrichtenabteilung; the Army had also set up a Cipher Bureau following the post-Versailles reorganisation of the German military.