An unnamed Narrator finds himself in a Grey Town, waiting for a bus. He boards the bus, along with a small number of other people, and the bus proceeds to fly over the grey town. The Narrator then talks with some of the other people on the bus, some of whom remember dying in various ways. One man, Ikey, tells the Narrator that the grey town is always getting bigger as more and more people enter it. Some of these people get closer to the bus stop, so that one day they can drive away. Others drift farther from the bus stop—indeed, some people in grey town must be millions of miles from the bus stop by now.
The bus lands on a huge cliff, and the Narrator and the other passengers get out. They find that they’ve landed by a beautiful river, surrounded by grass and trees. However, the Narrator quickly discovers that everything in this place is motionless—even the blades of grass are rigid and hard. This makes walking around very painful. The Narrator also realizes that he no longer has a solid body—he and his peers are ghosts. The Narrator slowly realizes that he’s in the afterlife. As he realizes this, he sees a group of Spirits approaching the ghosts. The Spirits are bright and have solid bodies—they’ve come to try to convince the ghosts to come with them toward the beautiful, majestic mountains in the distance. But most of the ghosts refuse to do so. One, the Big Ghost, notices that one of the spirits is Len, a man he knew while they were both alive. Len killed a man, and yet has become a Spirit, while the Big Ghost has led a supposedly virtuous life, and yet was sent to the dreary Grey Town. Len tries to convince the Big Ghost to “love,” but the Big Ghost refuses, and walks back to the bus, eager to return to the Grey Town.
The Narrator witnesses other spirits trying to convince the ghosts to stay by the river, regain their solid bodies, and eventually climb to the top of the mountain. Each time, however, the ghosts refuse to stay, and walk back to the bus. Ikey, who’s eager to make “a tidy profit” in the Grey Town, picks golden apples from a tree and carries them back to the bus, causing himself great pain in the process. Another ghost, the Hard-Bitten Ghost, tells the Narrator to be careful, and argues that “the same people” must control the river, the mountains, and the grey town. The Hard-Bitten Ghost’s words fill the Narrator with despair.
Just as the Narrator is thinking of returning to the bus, he sees the Spirit of one of his favorite authors, George MacDonald. MacDonald greets the Narrator cheerfully and promises to show him around. He explains that the Narrator has come on a “vacation” from Hell, the Grey Town, to the “Valley of the Shadow of Life.” There are many people in the Grey Town who visit the Valley and then return to the Town forever. For these people, the Grey Town is Hell. But there are others who stay in the Valley instead of returning to the Grey Town—for these people, the Grey Town is merely Purgatory; a place for them to exist before they “climb” up to Heaven. The people who are too stubborn to go to the mountains and love God, MacDonald explains, are like stubborn children who would rather be miserable than humble.
For the rest of the book, MacDonald carries the Narrator around the Valley, showing him conversations between Spirits and ghosts. In the first conversation, the Narrator sees a Spirit trying to convince the ghost of a famous Artist to remain in the Valley and go to Heaven. The Artist arrogantly refuses, claiming that he couldn’t stand to live in a place without personal property, where his painting wouldn’t be appreciated.
MacDonald shows the Narrator a female ghost who complains so much about her husband that she eventually disappears entirely—she’s so consumed by pettiness and fussiness that she no longer has a soul. Another female ghost, Pam, argues with the Spirit of her brother, Reginald, about her love for her dead child, Michael. Pam claims to love Michael so much that she couldn’t love anyone else during her lifetime. Reginald argues that Pam must surrender her love for Michael in order to love God completely—and afterwards, Pam will be reunited with Michael in Heaven forever. Pam refuses to give up her love for her son, though, claiming that Reginald is being cruel.
Another ghost carries a tiny lizard on his shoulder—MacDonald explains to the Narrator that this lizard is Lust. Reluctantly, the ghost allows an angel to crush the lizard, freeing the ghost from his burden to sexual desire. To the Narrator’s amazement, the lizard transforms into a beautiful horse, who gallops away with the ghost, now a new-born man, toward the mountains. MacDonald explains that by surrendering our earthly desire—even for our loved ones—humans can become more beautiful, more powerful, and more loving than they ever thought possible.
In the final chapters of the novel, MacDonald shows the Narrator a beautiful Spirit, Sarah Smith. Sarah reunites with a man she once knew, Frank. Frank has become so embittered and self-hating that he’s separated into two ghosts: a tall “Tragedian” ghost and a small “Dwarf” ghost. The Small Ghost—a bitter, self-hating being—uses a heavy chain to control the Tall Ghost—an overdramatic being who overreacts whenever Sarah does something even mildly offensive. Sarah, speaking to the Small Ghost, tries to tell Frank that he doesn’t have to hate himself anymore—he’s in a place of boundless love. The Small Ghost is almost ready to laugh along with Sarah and stay in the Valley. But instead, he pulls his chain, and the Tall Ghost rages theatrically, accusing Sarah of having never loved him. The Small Ghost shrinks until he’s no longer visible at all. Then, the Tall Ghost disappears, too. MacDonald explains to the Narrator that Frank was trying to manipulate Sarah’s pity and concern in order to pass along some of his own self-hatred to Sarah. While it might seem cruel for Sarah to be happy in the Valley, rather than spending her time pitying Frank, MacDonald insists that the saved should rejoice in their own salvation, rather than pitying the damned. If it were otherwise, he argues, then people in Hell would be able to “blackmail” people in Heaven into feeling miserable.
The Narrator asks MacDonald if the people in Hell will remain in Hell for all eternity, or if one day, God will free them and bring them to Heaven. MacDonald says that Heaven is open to all those who truly desire it. However, the Narrator must not ask questions about what will happen to human beings in the future. It is the nature of human beings to live in time, uncertain about their future possibilities. For a human being to learn the mysteries of salvation would involve that human being standing “outside of time” and seeing the future—in other words, ceasing to be a human being. MacDonald illustrates this concept by taking the Narrator to a huge chessboard, across which chess pieces move rapidly.
The Narrator suddenly wakes up—he’s been sleeping in his study.