Approaching its 200th anniversary, Gotham City's leaders fear that the high level of criminal activity will deter citizens from attending the celebrations. Gotham's mayor William Borg orders District Attorney Harvey Dent to make the city safe again, in hopes of revitalizing local business. Dent, in turn, targets mob boss Carl Grissom, who sponsors much of the criminal activity within Gotham and has paid off a significant segment of the police force.
Meanwhile, a dark vigilante dressed as a bat has attracted the attention of both the police and the local media. Newspaper reporter Alexander Knox is attempting to investigate, but his questions are deflected by skeptical cops, including Lt. Eckhardt, one of many police officers on the take from Grissom. After stonewalling Knox, Eckhardt is shown taking a payoff from Grissom's second in command, Jack Napier.
Grissom, on discovering that his mistress is involved with Napier, sets him up to be killed by Eckhardt in a raid on Axis Chemicals. The plot is foiled by the arrival of Police Commissioner James Gordon, who wants Napier taken alive, and Batman. Batman captures Napier, but releases him when Bob the Goon holds Gordon hostage at gunpoint. Batman vanishes, and in the confusion, Napier shoots and kills Eckhardt, then attempts to shoot a re-emerged Batman. The latter deflects his shot, sending shrapnel into the former's face. Napier falls over a railing into a vat of chemicals, presumably to his death. Although surrounded by the police, Batman escapes the scene.
Batman, as we discover, is actually billionaire industrialist Bruce Wayne, an orphan who lives alone in the large mansion Wayne Manor, with only his butler Alfred Pennyworth in attendance. At a fundraising party, Bruce meets and falls for famous photojournalist Vicki Vale, recently arrived in town to cover the "Bat Man phenomenon."
Napier, in the meantime, is not dead but horribly disfigured, with white skin, green hair, and a permanent grin (after a botched reconstructive surgery attempt). Already unstable, the trauma has apparently driven him completely insane. Calling himself "The Joker", he kills Grissom and usurps his criminal empire. His first scheme is to spread terror in the city by creating hygiene products that can kill by fatal hilarity due to being tainted with a deadly chemical known as "Smylex," so named because its effects on the nervous system leave a gruesome leer on victims' corpses. (An earlier scene in the Joker's lair reveals "Smylex" to be a Vietnam-era CIA-developed nerve agent. A folder identifies the substance as "Ddid nerve gas," likely a dioxin compound, supposedly discontinued in 1977). Following the death of a news anchor on-air, the city becomes paralyzed with fear (an unproduced scene shows that the purpose of the scheme was indeed chaos, but directed chaos – Gotham has faced crime waves, but the Joker has crippled the city's economic and social infrastructure – every hygiene product is rejected due to the potential risks, causing both severe damage to the stock market and horrifying health concerns, as no one dares even use soap). Making war on several fronts, the Joker then sets a trap at Gotham's Flugelheim Art Museum for Vicki, with whom he has become smitten. In the process, he defaces every piece of art in the building, save one (he spares Francis Bacon's Figure with Meat, saying "I kinda like this one"). Batman intervenes and saves Vicki, taking her to the Batcave to reveal to her the secret of the Joker's plot – the authorities are failing to put an end to the crisis because they are testing individual products for poison. The Joker has actually tainted hundreds of products at the source with individual components of the poison, and they only kill when mixed – any incomplete set of components is harmless and therefore untraceable. He gives her a complete list of toxic combinations, then renders her unconscious – he knows she photographed him during the rescue, and while he was impressed enough to give her the list instead of the police, he couldn't let her keep the film from her camera. She awakens at home, and after bemoaning the loss of the film, calls her editor with the list, which makes the morning paper. Incensed at Batman eluding him while taking Vale and ruining his poisoning scheme, the Joker vows to eliminate the mysterious vigilante for interfering with his plans.
Vicki's apartment is then the scene of a confrontation between the Joker, who has come to woo her, and Bruce, who has come to try and confess about his double life. After Bruce challenges the Joker to a fight, the Joker pulls a gun and asks him: "Tell me something, friend. Have you ever danced with the devil by the pale moonlight?" He then shoots Bruce. The Joker then leaves amid his own hoopla, and Vicki is shocked to see that Bruce has disappeared, leaving behind only a metal platter which he used as an impromptu bulletproof vest.
That confrontation confirmed for Bruce that the Joker is actually the man who murdered his parents many, many years ago in Gotham. The final clue was that his parents' murderer said the same phrase to him as The Joker said in Vicki's apartment ("Ever dance with the Devil by the pale moonlight?"). As Bruce grapples with this memory, he is shocked by the sudden appearance of Vicki in the Bat Cave, Alfred having decided that she deserved to know the truth.
Deciding the time has come to end the Joker's reign of terror, Batman tells the confused and torn Vicki that it's time for him to "go to work." His car breaks through into the Axis Chemical plant, where the Joker has been manufacturing his lethal cocktail, and activates its retractable armor while the Joker's goons attack. Dropping four high-powered bomblets from its hubcaps, the batmobile then beats a hasty retreat out of the exploding factory, coming to a dead halt in front of Batman, who had been remotely controlling the vehicle from a safe distance. However, the destroyed factory is far from the end of the Joker's schemes. Taunting his enemy from a helicopter, the Joker heads off, leaving Batman to anticipate his next move.
Deep in downtown Gotham, the Joker has put his own plans in motion to upstage the city's canceled anniversary celebrations with a grand spectacle: a nighttime parade at which he will dispense $20 million in free cash. Vicki and Knox are there to cover the pandemonium, and they notice strange tanks on the balloons. In the middle of his generosity, the Joker begins gassing the crowd. Batman arrives in his bat-shaped jet and snatches the balloons away to carry them out of the city and into the stratosphere. Furious, the Joker shoots Bob the Goon, his number one thug, in frustration. Batman returns to make a strafing run on the Joker, who responds by shooting down the jet with an insanely long-barreled revolver. Vicki approaches the downed craft but is captured by the Joker, who leads her to the top of Gotham Cathedral. Dazed but not finished, Batman pursues. At the top of the cathedral, the two adversaries confront each other in single combat. After defeating the Joker's minions, the Joker admits that he murdered Wayne's parents, shrugging off the slaying as youthful arrogance.
In a moment of opportunity, the Joker pulls Batman and Vicki off the belfry, where they cling to the ledge for their lives. The Joker's helicopter appears and he grabs hold of a dangling ladder, about to escape. Batman shoots a wire around the Joker's leg, connecting it to a stone gargoyle on the ledge. As the Joker is lifted away, the wire pulls the gargoyle loose, weighting down the Joker and causing him to plummet to his death.
The movie ends with Commissioner Gordon announcing that the Gotham police have arrested the rest of the Joker's gang and unveiling the Bat-Signal, supplied by Batman with a note promising to return if the city needs him.
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