Crummy Little Town? Or Hidden Upstate Paradise?
Frank Capra loved small-town America. George Bailey isn't so sure.
On George's first date with Mary, he tells her about his ambitions and dreams, saying, "I'm shaking the dust of this crummy little town off my feet, and I'm going to see the world." This, of course, never happens; he remains firmly planted right in Bedford Falls, where all of the film's action takes place. It's the kind of town where people live for generations. When George crashes his car on Christmas Eve, the owner of the house yells at him, "My grandfather planted that tree!"
While fictional, Bedford Falls is located in upstate New York. (The screenplay explicitly states this, though no one in the movie ever directly says, "We're in upstate New York!") Buffalo and Rochester are referenced as nearby locations, and Sam Wainwright runs his business from New York City.
The little town of Seneca Falls, New York, claims to be the real model for Bedford Falls. They hold an annual It's a Wonderful Life festival. Sometimes people from the movie, like the actress who played Zuzu, make appearances there.
But, setting isn't just about place. It's about time. In this case, we see George Bailey's life from roughly after the end of World War I—Mr. Gower's son dies of influenza, which may be a reference to the deadly Spanish Influenza epidemic of 1918—through to the period just after the end of World War II. Two world wars, an epidemic, and a devastating economic depression—it wasn't the easiest of times. George's breakdown happens on Christmas Eve of 1945.
We see how the Great Depression of 1929 causes a run on the bank and threatens the Building and Loan. During World War II, George acts as an air-raid warden and keeps serving the community, while Harry becomes a Navy flier. An uplifting story like It's a Wonderful Life was just the thing for the hearts of people who'd just been through a difficult and trying time during World War II.
Pottersville: Nexus of Sleaze
The story also uses the setting to show what life would've been like if George hadn't been born: Bedford Falls becomes Pottersville, full of sleaze and greed and glitz, a Vegas-lite. Potter controls the city, having driven the Bailey brothers out of business years ago. The renovated house George and Mary live in is still abandoned, and Ma Bailey runs a dingy and depressing boarding house.
After being restored to reality, George runs through the town in one of the movie's most famous and oft-parodied scenes: "Hello, Bedford Falls! Merry Christmas! Merry Christmas, movie house! Merry Christmas, Emporium! Merry Christmas, you wonderful old Building and Loan! Hey! Merry Christmas, Mr. Potter!" George is able to see Bedford Falls with new eyes. Instead of seeming like the hick town he thought it was, it's now a precious place.