This movie is about a divine intervention by a guardian angel, to help a man in distress. It opens with a a fanciful depiction of angels in heaven discussing a problem that has come up. They are receiving prayers from mortals, like "Please, God, something's the matter with Daddy". George Bailey (James Stewart
) is about to kill himself, and they need to send an angel down to Earth to stop him. They select Clarence (Henry Travers
), a somewhat down-on-his-luck angel who hasn't earned his wings yet, but who they decide is right for the job. The senior angels promise that Clarence will get his wings if he succeeds. The bulk of the movie is a replaying, by the senior angels and for Clarence's benefit, of George's life, so that Clarence will understand George.
George Bailey was a young man, living in a small town, but with big dreams. From an early age, he wanted to get away from Bedford Falls, travel the world, and accomplish big things--planning cities and building huge airfields, skyscrapers, and bridges. The first incident that Clarence sees is that, at age 12, George saved his younger brother Harry's (Todd Karns
) life in an accident while playing on an ice-covered pond. George lost the hearing in his left ear due to being in the icy water. Shortly after that, while working part-time in Mr. Gower's (H.B. Warner
) drug store, he prevents a mistake in a prescription from fatally poisoning someone. The two little girls in George's life at that point are Mary Hatch (Donna Reed
) and Violet Bick (Gloria Grahame
), who seem to be competing for his notice.
George's father (Samuel S. Hinds
), with a small staff including Uncle Billy (Thomas Mitchell
), run a small Building and Loan company that finances mortgages for the people of Bedford Falls. They face a difficult battle with the evil, avaricious, and wealthy Henry Potter (Lionel Barrymore
). Potter is on the board of directors of the Building and Loan, holds much of its assets, along with almost everything else in town, charges people exorbitant rent on his own apartments, and would like to put Bailey's company out of business.
George wants to begin his adventures after going to college. While he has enormous respect for his father and what he is doing to help people, he definitely does not want to follow in his father's footsteps at the Building and Loan. But one thing after another thwarts his plans.
George went to work at the Building and Loan for a few years after graduating from high school, with the expectation that Harry would take this over when he graduated, and George would go on a European tour and then go to college. But his father has a fatal stroke, and George has to take over the B&L for a few months, giving up the European tour. Then Potter attempts to liquidate the B&L, the only thing that can stop it is for George himself to take it over. So he gives up college, and gives his college money to Harry. The plan at that point was that, after Harry graduates, he will take over the B&L, and George will go to college. But Harry returns from college having married Ruth Dakin, and Ruth's father has offered him a job in upstate New York. So George has no choice but to stay with the B&L.
George marries Mary Hatch after a difficult introduction--he mistakenly thinks Mary is in love with his lifelong rival Sam Wainwright (Frank Albertson
). They are about to go on their honeymoon with $2000 they have saved up. But a banking crisis occurs. Potter has taken over the bank that guarantees the B&L's loans, and has called in the loans. The customers are in a panic and are tempted to go over to Potter's bank. The only way George can save the situation is to provide for the customers' needs out of his honeymoon money. Their friends Ernie (Frank Faylen
) the cabbie and Bert (Ward Bond
) the policeman arrange for them to have a cut-rate honeymoon at their house. They serenade the newlyweds from outside in the rain.
The B&L continues to provide affordable housing for the people of Bedford Falls, creating a whole subdivision "Bailey Park". This includes the home of Mr. Martini (William Edmunds
), the local tavernkeeper, and his family. Sam Wainwright and his wife come by to offer that George and Mary take a vacation with them in Florida, but they can't get away even for that.
Potter is disturbed that George's B&L is taking customers away from his own apartment business, and attempts to bribe George into working for him instead, offering a huge salary and extensive travel. Tempting as that is, George is repelled by everything Potter stands for, and declines.
So George stays with his wife and four children in Bedford Falls, never getting to leave. World War II comes and goes, and Harry serves (George is exempt because of his ear) and heroically saves an entire transport ship by shooting down two attacking airplanes. He is awarded the Congressional Medal of Honor at a ceremony in Washington.
On the morning before Christmas, the day that Bedford Falls will have a huge celebration for Harry, a bank examiner arrives to conduct a routine audit. The same day, Uncle Billy goes to the bank for a routine deposit of $8,000 in cash. Potter happens by, and Billy proudly points out the newspaper with the news about Harry. He accidentally folds the newspaper with the cash envelope in it, and Potter takes it back. Billy then realizes that he has lost the money. Potter, now in another room, sees this, and leaves quietly.
Billy arrives at the B&L, where George, generous as always, is giving Violet some of his own money for her to travel to New York City and start a new life. When Billy tells George about the loss, there is an uproar. George and Billy search everywhere that the money could possibly have been left. George shouts at Billy that this means bankruptcy, scandal and prison, and that he, George, isn't the one who will go to prison.
George goes home in an incredibly foul mood, where his family are preparing for a Christmas party that evening. George is extremely bitter and nasty, and verbally abuses everyone, saying at one point "Why do we have to have all these kids?" The whole family are alarmed at his behavior. He learns that their youngest daughter "Zuzu" (Karolyn Grimes
) is in bed with a cold. She apparently caught it walking home from school, having not buttoned her coat because she didn't want to harm a rose that she had been given. George goes up to see her. While handling the rose, some petals fall off. George puts them in his watch pocket.
Zuzu's teacher, Mrs. Welch, phones to ask about Zuzu. George gives her a brutal tongue-lashing over her carelessness. When Mr. Welch gets on the line, George abuses and threatens him. Then George starts kicking and throwing things. The children are in tears. George storms out of the house. Mary phones Uncle Billy to find out what's wrong. The children ask whether they should pray for their father, and Mary says yes.
While word spreads of the calamity, George goes to see Mr. Potter to beg for a loan of 8000 dollars. Mr. Potter is completely unsympathetic and sarcastic. He suggests that George has been cooking the books, playing the market with company money, or perhaps paying off a woman, pointing out that he is known to have been giving money to Violet Bick. Potter asks about collateral. All George has is a fifteen thousand dollar life insurance policy, but with only five hundred dollars equity. Mr. Potter says "You're worth more dead than alive."
George goes to Mr. Martini's tavern and starts drinking, and then praying for divine guidance. His friends notice and try to help. Mr. Martini mentions his name out loud, and Mr. Welch, sitting nearby, hears it. He punches George, causing a bloody lip. George leaves, though his friends urge him to stay and rest. George drives his car toward a bridge. Because of the snowy weather, he accidentally drives it into a tree. The homeowner comes out and chews him out for harming the tree. George just keeps walking, out onto the bridge, to kill himself.
Just as George is about to jump into the frigid river and drown, Clarence comes down to Earth; his moment has come. He knows George well enough to know that if he, Clarence, jumps into the river, George will rescue him. He does so, and George jumps in and rescues him as predicted. They go to the toll-taker's shack to dry their clothes. Clarence explains all--that he is an angel, "Clarence Odbody, Angel second class", sent to save George from committing suicide. To George's astonishment, Clarence knows the whole story of his life. George is disbelieving and cynical about the whole thing, mentioning that it is not surprising that he got only a second-class angel, one without wings. He resists Clarence's entreaties, believing that he must have consumed tainted liquor. He finally says "I wish I'd never been born." Clarence formulates his plan, and, after a little prayerful communication with the senior angels, says "You've got your wish. You've never been born."
Things change immediately. In the alternate universe it isn't snowing. George notices that he can hear through his left ear, and his lip isn't bleeding. Clarence points out that many things will be different now.
They walk back toward town, past the tree that George had hit with his car. The car is gone, and there is no gash in the tree. The homeowner stops by, and George asks about the car and the damage to the tree. The homeowner knows nothing about this. He says "You had me worried. One of the oldest trees in Pottersville."
They continue into town. Martini's tavern has become a sleazy dive, and Mr. Martini is nowhere to be found. It is now owned by Nick, who had worked there in real life. George and Clarence sit down at the bar. Clarence's speech and demeanor immediately displease Nick, who is an unpleasant fellow. George knows Nick, but Nick does not know George. When a cash register rings, Clarence points out that, whenever that happens, it means an angel has earned his wings. An elderly Mr. Gower comes in, and Nick tells him to leave. George speaks to Mr. Gower, but Mr. Gower doesn't recognize him. Nick says that Mr. Gower spent 20 years in prison for poisoning some child, and that if this stranger knows Mr. Gower, he must be a convict also. Nick has George and Clarence thrown out of the tavern, and then derisively makes the cash register ring, saying that he is giving out angel wings.
In front of the tavern, George is seriously disturbed by what is going on. Clarence explains once again that George doesn't exist. George checks his pockets for his wallet, other identification, or his life insurance policy. Clarence points out that they do not exist. Finally, George checks his watch pocket. Clarence says "They're not there either." "What?" "Zuzu's petals. You've been given a great gift, George. The chance to see what the world would be like without you."
Continuing to be in denial of what is going on, George continues to walk downtown without Clarence. Bedford Falls has become Pottersville, and it is a dreary, brutish, and perverse place, full of bars and sleazy nightclubs. The movie theater, and the B&L, are long gone. Police are everywhere, dealing with disorders. George sees the police arrest Violet and take her away from a brothel. He hails Ernie's cab and asks to be taken home. Ernie has no idea who he is or where he lives. He gives Ernie the address, and Ernie tells him that that is an abandoned house, but he will take him there anyway. Ernie also tells George that his wife left him three years ago, and that he now lives alone in a place called Potter's Field. He visually signals for Bert the policeman to follow them. As George searches the house calling out for his family, Clarence appears. Bert attempts to arrest them, but Clarence vanishes, allowing George to escape.
George then goes to his mother's house, but she does not recognize him. He mentions Uncle Billy, and she says that he has been in a mental hospital for many years since the B&L went out of business.
Still in denial of what is happening, George then goes with Clarence to Martini's house in Bailey Park. There is no such place--it is a wasteland with a cemetery. Clarence points out the grave of Harry Bailey. Clarence says "Your brother Harry Bailey broke through the ice and was drowned at the age of nine."
"That's a lie! Harry Bailey went to war. He got the Congressional Medal of Honor. He saved the lives of every man on that transport." says George.
"Every man on that transport died. Harry wasn't there to save them, because you weren't there to save Harry. You see, George, you really had a wonderful life. Don't you see what a mistake it would be to throw it away?"
George then asks to see Mary. Clarence says that she never married, and works at the library. George goes there. She doesn't recognize him. He tries to embrace her; she screams and runs into a nightclub. He runs after her. The police intervene. George slugs Bert and runs away. Bert shoots at him but misses, then pursues in his car.
Finally aware of what is happening, George runs to the bridge where he had been about to jump, and calls out "Help me Clarence, please! Please! I want to live again!"
The alternate universe ends. It's snowing once again. Bert arrives in his police car, and calls out to George that he's been looking for him, since seeing his car plowed into the tree. He also points out that George's lip is bleeding. George is delighted to hear this, and to know that Bert knows him. He checks his watch pocket; the rose petals are there.
George is ecstatic. He runs into town, which is once again Bedford Falls, and has all its familiar institutions. He goes home, knowing that he will likely be arrested for bank fraud. The officials are there, ready to arrest him. But his children are there also, and all have a joyful reunion. Mary comes home, along with many people led by Uncle Billy. When word got around that George was in financial trouble, the townspeople that he had been so generous to had contributed whatever they could provide. Dozens of people arrive, with a whole laundry basket full of money, jewelry, and other valuables. A telegram arrives from Sam Wainwright in Europe, saying that he had been contacted by Mr. Gower, and would advance up to $25,000 to cover the debt on the B&L. Harry arrives from New York, and toasts "To my big bother George, the richest man in town."
In the last scene, a bell on the Christmas tree rings. Zuzu says "Look, daddy. Teacher says, every time a bell rings, an angel gets his wings." George says "That's right. That's right." And, glancing heavenward, "Attaboy, Clarence."