On Christmas Eve 1945, in Bedford Falls, New York, 38-year-old George Bailey contemplates suicide. The prayers of his family and friends reach heaven, where Angel 2nd class Clarence Odbody is assigned to save George to earn his wings. Clarence is shown flashbacks of George's life. He watches 12-year-old George save his brother, Harry, from drowning; as a result, George loses his hearing in his left ear. Later, George prevents the town druggist, Mr. Gower, who is distraught from his son's death, from accidentally poisoning a child's prescription.
In 1928, George plans a world tour before college and is reintroduced to Mary Hatch, who has always had a crush on him. The attraction becomes mutual at her high school dance. When his father suffers a stroke and dies, George postpones his travel to sort out the family business, Bailey Brothers Building and Loan, which avaricious board member Henry F. Potter, who controls most of the town's businesses, seeks to dissolve. The other board members vote to keep the Building and Loan open if George will run it. George acquiesces and works alongside his absentminded uncle, Billy, and gives his tuition to Harry, with the understanding that Harry will run the business when he graduates.
Harry returns from college married and with an excellent job offer from his father-in-law. George is dejected but doesn't stand in Harry's way and continues running the Building and Loan. Immediately following their wedding, George and Mary witness a run on the bank, and use their $2,000 honeymoon savings to keep the Building and Loan solvent.
Under George's leadership, the company eventually establishes Bailey Park, a modern housing development to rival Potter's overpriced slums. Potter offers George $20,000 a year to be his assistant, but, realizing that Potter's true intention is to shut down the Building and Loan, George rebuffs and rebukes him.
During World War II, George is ineligible for service because of his deaf ear. Harry becomes a Navy pilot and earns the Medal of Honor for shooting down two kamikaze planes headed for a troop transport. On Christmas Eve 1945, as the town prepares a hero's welcome for Harry, Billy goes to the bank to deposit $8,000 of the Building and Loan's cash. Billy taunts Potter with a newspaper headline about Harry, but unintentionally wraps the envelope of cash in Potter's newspaper and hands it to Potter. Potter finds the envelope but says nothing, while Billy cannot recall how he misplaced the cash. With a bank examiner reviewing the company's records, George realizes scandal and criminal charges will follow. Fruitlessly retracing Billy's steps, George berates him and takes out his frustration on his family.
George desperately appeals to Potter for a loan, offering his life insurance policy with $500 in equity as collateral. Based on the policy's $15,000 nominal value, Potter says George is worth more dead than alive, and phones the police to arrest him for misappropriation of funds. George flees, gets drunk at a bar, and prays in vain for help. Suicidal, he goes to a nearby bridge, but before he can jump, Clarence appears and leaps into the river. George dives in and rescues him and they dry off in the tollhouse.
When George wishes he had never been born, Clarence shows him a timeline in which he never existed. Bedford Falls is now Pottersville, an unsavory town occupied by sleazy entertainment venues, crime, and amoral people. The lives George touched are vastly different. The druggist, Mr. Gower, was imprisoned for manslaughter since George was not around to prevent him from poisoning the pills. George's mother doesn't know him. She reveals that Billy was institutionalized after the Building and Loan failed. Bailey Park is a cemetery, where George discovers young Harry's grave. Since George did not save Harry, Harry was not there to save the soldiers on the transport ship. George finds that Mary is a spinster librarian. When he claims to be her husband, she screams for the police and George runs away.
Convinced by the vision Clarence presented, George races back to the bridge and begs for his life back. George finds he is back in his life as it was, but now he is full of gratitude for that life. He then rushes home. Mary and Billy arrive at the home after rallying George's supporters, who donate more than enough to cover the missing $8,000, culminating in a massive advance an offer of $25,000 supplied by George's wealthy industrialist friend, Sam Wainwright. Seeing this, the sheriff tears up the arrest warrant. Harry arrives and toasts George as "the richest man in town".
George receives a copy of The Adventures of Tom Sawyer as a gift from Clarence, with a note reminding George that no man is a failure who has friends, and thanking him for his wings. At that moment, a bell on the Christmas tree rings. George's youngest daughter Zuzu explains that it means that an angel has earned their wings, signifying Clarence's promotion.
James Stewart as George Bailey
Donna Reed as Mary Hatch
Lionel Barrymore as Mr. Potter
Thomas Mitchell as Uncle Billy
Henry Travers as Clarence
Beulah Bondi as Mrs. Bailey
Frank Faylen as Ernie
Ward Bond as Bert
Gloria Grahame as Violet
H. B. Warner as Mr. Gower
Frank Albertson as Sam Wainwright
Todd Karns as Harry Bailey
Samuel S. Hinds as Pa Bailey
Mary Treen as Cousin Tilly
Virginia Patton as Ruth Dakin
Charles Williams as Cousin Eustace
Sara Edwards as Mrs. Hatch
Bill Edmunds as Mr. Martini
Lillian Randolph as Annie
Argentina Brunetti as Mrs. Martini
Bobbie Anderson as Little George
Ronnie Ralph as Little Sam
Jean Gale as Little Mary
Jeanine Ann Roose as Little Violet
Danny Mummert as Little Marty Hatch
Georgie Nokes as Little Harry Bailey
Sheldon Leonard as Nick
Frank Hagney as Potter's Bodyguard
Ray Walker as Joe (Luggage Shop)
Charlie Lane as Real Estate Salesman
Edward Kean as Tom (Bldg. & Loan)
The Bailey Children
Carol Coomes as Janie Bailey
Karolyn Grimes as Zuzu Bailey
Larry Simms as Pete Bailey
Jimmy Hawkins as Tommy Bailey
Famous or memorable uncredited cast members include Stanley Andrews as Mr. Welch, the teacher's husband; Al Bridge as the Sheriff with the arrest warrant against George; Adriana Caselotti as Singer at Martini's; Ellen Corby as Bailey Brothers Building & Loan customer Miss Davis; Dick Elliott as the bald man on his front porch; Charles Halton as the bank examiner Mr. Carter; Harry Holman as the high school principal Mr. Partridge; Harold Landon as Marty Hatch; J. Farrell MacDonald as the man whose grandfather planted the tree George drives into; Mark Roberts as Mickey, the student with the swimming pool keys and Carl "Alfalfa" Switzer as Freddie Othello, the student who unsuccessfully tries to flirt with Mary. Joseph Granby provided the voice for the Angel Joseph, while Moroni Olsen voiced the Senior Angel