The short answer is that the orchestra served as a useful propaganda tool both at home and abroad, helped the Nazi regime achieve their initial goal of seperating Jews from German society and culture, and served as a means of social control.
Allowing the Jüdischer Kulturbund or Jewish Cultural Federation was not as inconsistent with overall Nazi policy towards Jews as it might at first seem. From the time the Nazis came to power in 1933, their policy was to exclude Jews from German society. For the Nazis, there were Germans and there were Jews; there was no such thing as a German Jew. Thus, in April 1933 Hitler
permitted an organised boycott of Jewish businesses and his government
enacted a string of laws that gradually excluded the Jews from
government employment and public life. Under the Nuremberg Laws of
1935 German Jews were reduced to subject status and lost the rights of
citizens. Germany became, in effect, an apartheid state.
These exclusions from German society included musicians, actors and other performers. Also in 1935, the original name of the league, Kulturbund Deutscher Juden or the Cultural Federation of German Jews was no longer acceptable and was changed to remove any reference to ‘German’ in relation to ‘Jewish’ or ‘Jews’.
"A membership drive for the Kulturbund" Source: “VOM JÜDISCHEN SCHICKSAL” – THE JEWISH CULTURAL LEAGUE, OR DER KULTURBUND
Other than emigration (which required money many Jews did not have), the only option left for those who wished to continue to perform (and earn a living) was with the Kulturbund, an organization which was separated from German society by only being allowed to perform for Jewish audiences. As further evidence of this separation from German society and culture (thereby ‘purifying’ it), their programmes were strictly controlled by officials under Hans Hinkel at the Ministry of Propaganda.
Performances of German composers were increasingly restricted and eventually banned altogether. Lily E. Hirsch, in A Jewish Orchestra in Nazi Germany, says
Nazi leaders justified the creation of the League, in part, by arguing
that when Jews performed German masterworks they degraded and polluted
them. In short, Jews could and should only create Jewish music.
The Kulturbund orchestra was thus increasingly required to perform only Jewish works (which proved very hard to define), but could also use (until September 1936) Arnold Schoenberg and non-German composers deemed to be ‘degenerate’ by the regime. This enabled the Nazis to show and tell the world how tolerant it was of both Jews and of non-German music while, at the same time, telling Germans that Jews were only fit to perform the music of degenerate artists. As Hirsch says,
By pointing to their support of the League, Nazi leaders could claim
that Jews were not oppressed but encouraged to find their own forum
for cultural expression. We can see this exploitation in newspaper
articles and broadcasts from the period that point to the League as
“showcase.” Through it, the world was to see how much freedom Jews had
in Nazi Germany. As Hinkel bragged in a broadcast speech of 1935, the
League had 25,000 members in Berlin, and probably 100,000 in the whole
of Germany. These facts were to counter negative press abroad, and, as
Hinkel himself explained, “refute the slanderous rumours circulating
abroad and alleging barbarous treatment of the Jews in Germany.”
The Kulturbund also proved useful before and during the 1936 Berlin Olympics:
With international attention turned to Berlin for the 1936 Olympics,
Hinkel even used the Kulturbund as a propaganda tool, announcing the
high standards of productions and nightly sold-out performances.
Hirsch cites another reason for allowing the Jüdischer Kulturbund:
The creation of the League functioned as a mechanism of local social
control by facilitating tighter policing of cultural activity and
later Jewish activity in general. It also represented a means to quell
any potential resistance by providing the many recently displaced Jews
with a new source of income. Although the League could not employ all
unemployed Jews, the jobs it did provide offered others hope for
future economic stability.
By 1941, the Jüdischer Kulturbund had outlived its usefulness. Convincing the foreign media that the Nazis were not persecuting Jews was less relevant as Germany had either conquered or was at war with most of the countries it had previously been trying to mollify (the US being a notable exception of course). From late 1939, deportations of Jews became more frequent and Hirsch notes that
Hitler had also become committed to the elimination of European Jewry
and had approved the mass deportation of German Jews eastward.
Although the Final Solution was not discussed until the Wannsee
meeting on 20 January 1942....Hitler’s approval of deportation was a
decisive turn toward murder. Time had run out for Jews in Germany, and
the Jewish Culture League no longer had a place in Hitler’s plans. As
reason for the liquidation of the League, however, the secret police
cited Paragraph 1 of the Reich president’s order of 28 February 1933 —
for “the protection of people and state.”
However, this was not quite the end of the usefulness of Jewish musicians. Hirsch again, with reference to Theresienstadt concentration camp:
In May 1943, Nazi leaders invited members of the German press to the
camp and encouraged them to attend a concert and witness a prescreened
trial as evidence of the autonomous Jewish government and the Jews’
healthy cultural life.
A documentary was produced and, in 1944, the camp even passed an inspection by the Red Cross. Such was the power of Nazi propaganda.