The film opens with an elderly woman, who reveals herself to be a kindly witch, telling the audience about the town of Grisham Heights, owned by the selfish and dance obsessed Count Grisham. She explains that she was Grisham's dance teacher, until he chased her into hiding when he accidentally discovered that she was a witch, and was forced to live in an abandoned house far outside of the village, with only her magic broom Bristles for company. She then goes on to explain the town's workhouse mill, which is where all orphans and debtors are sent to work off their debts, and that is takes thirteen pieces of silver to buy your freedom. The witch then introduces the audience to Polly, a girl who has been in the mill nearly her whole life, but has been saving her silver coins and hiding them at the foot of her scarecrow (without realizing that the witch lives at the house). Because she is lonely, the witch decides to bring her scarecrow to life after Polly leaves, using a magic feather to do so, which also allows a pessimistic mouse, Max, who lives in the Scarecrow's pocket, to talk.
As the years go by, Scarecrow begins to fall in love with Polly after her constant visits to the witch's garden to hide her silver coins. It's shown by the witch that Polly earned her required amount a long time ago, but decided to stay when three more, much younger orphans arrived, and wished to help them so they could leave together, so she is still at the mill, even as an adult. Seeing that Scarecrow is in love with Polly, and worried she'll be discovered and chased away again, the witch leaves the village, telling Scarecrow that she will miss him and teaches him how to dance. Scarecrow is saddened, but determined to find a way to be with Polly and watch over her money until she is able to free herself and the children.
Meanwhile, Count Grisham, wants Polly to be his, and constantly attempts to woo her with promises of giving her and the children a good life and home, though Polly is able to see right through his selfish act and continuously turns him down, which angers him. On the day she earns the last silver coin they need, Grisham finds out and sends the workhouse mill overseer, Cheswick, to find Polly's silver. Cheswick follows Polly to the old garden, and digs up her money after she leaves, but Scarecrow reveals himself in an attempt to retrieve it and frightens Cheswick, who runs to Grisham's two thugs for help. They corner Scarecrow in the old house, where he discovers a magic feather and a message left to him by the witch, which tells him that the feather (when worn) will turn him human, but that "real life" will never be his until he is willing to give that life for another.
Scarecrow dons the feather and easily fools Grisham's thugs into believing he is merely a traveler named Feathertop, and they leave, though Cheswick is not convinced. Meanwhile, Polly, having heard the noise Cheswick made earlier, returns to the garden to find her money gone, and weeps in despair. The next morning, Grisham comes up with a plan to ensnare Polly with his "love spell dance" to make her his by holding a dance contest, with fifty two pieces of silver (the exact amount she needs) as the prize. Feathertop shows off his dancing skills to a crowd in the town square, which prompts Polly to ask him to teach her and be her partner at the dance. During her lesson, the two share a romantic, beautiful dance and begin to fall in love, until Grisham interrupts to ask Polly to be his partner for the dance. He is angry to learn that she already has a partner, and on the night of the contest sends his thugs to trap Feathertop so he cannot attend, which would give him a chance to use his "love spell", but Feathertop escapes the thugs and he and Polly win the contest. Feathertop gives all the money to Polly, and the two confess their love for each other, and plan to marry the next morning.
Grisham confronts Feathertop, and during the confrontation, discovers his true identity. He ties Scarecrow up in the same field and steals his feather, which transforms him into Feathertop upon wearing it, hoping to trick Polly into marrying him, but she is able to see right through him. Grisham tries to force her to marry him, but she, and the priest, refuse to go along with it, which humiliates and angers Grisham. Scarecrow manages to escape, and retrieves his feather thanks to help from Max, but decides to leave Polly because he knows he can never truly be with her since he is not human. Polly is still waiting for him at the church when Grisham angrily tells his manservant Woody that he intends to kill Polly for rejecting him, but Woody abandons him to warn Polly instead, while Bristles, who was eavesdropping, flies off to warn Feathertop that Polly is in danger.
Polly and the children attempt to escape town in Grisham's carriage, but the only way out is across a bridge over a gorge that Grisham has ordered his thugs to weaken. Feathertop arrives and climbs under to hold the supports together until Polly and the children are safely across, though Grisham tries to prevent him from doing so, and in the struggle falls to his death. Feathertop manages to hold the bridge together just long enough for the carriage to make it across, then falls into the gorge as it collapses. Max and Bristles search the rubble and find him apparently dead, but are overjoyed to see him alive, and they climb out of the gorge together. Polly is waiting at the top, and joyfully embraces Feathertop, who tries to explain why they can't be together, only to realize that his feather fell out of his hat when he climbed out of the gorge, meaning he is now human permanently. He and Polly kiss, and the town celebrates Grisham's demise by cleaning up and holding a large dance in the town square, while the witch brings a girl broom to life for Bristles, and closes the film by addressing the audience the same way she did at the beginning.