The plot revolves around the Joker's attempt to drive Gotham City Police Commissioner James Gordon insane, and is intercut with the villain's flashbacks to his early, pre-disfigurement life.
The man who will become the Joker is an unnamed engineer who quits his job at a chemical company to become a stand-up comedian, only to fail miserably. Desperate to support his pregnant wife Jeannie, he agrees to guide two criminals through the chemical plant he previously worked at so that they can rob the card company next door. During the planning, the police inform him that his wife has died in a household accident. Grief-stricken, the engineer tries to withdraw from the plan, but the criminals strong-arm him into keeping his commitment to them.
At the plant, the criminals make him don a special mask to become the infamous Red Hood. Unknown to the engineer, the criminals plan to use this disguise to implicate any accomplice as the mastermind and to divert attention away from themselves. Once inside, they almost immediately blunder into security personnel, and a shootout ensues. The criminals are gunned down and the engineer finds himself confronted by Batman, who is investigating the disturbance.
Terrified, the engineer jumps into the chemical plant's waste pound lock to escape Batman, and is swept through a pipe leading to the outside. Once outside, he discovers, to his horror, that the chemicals have permanently bleached his skin chalk-white, stained his lips ruby-red and dyed his hair bright green. This disfigurement, compounded with the man's misfortunes of that one day, drives him completely insane and marks the birth of the Joker.
In the present day, the Joker kidnaps Commissioner Gordon and imprisons him in a run-down amusement park, and shoots and paralyzes his daughter Barbara (a.k.a. Batgirl). His henchmen then strip Gordon naked and cage him in the park's freak show. He chains Gordon to one of the park's rides and forces him to view giant pictures of his wounded daughter in various states of undress, hoping to drive Gordon insane in order to prove that the most upstanding citizen can go mad after having "one bad day". Once Gordon has run the maddening gauntlet, the Joker puts him on display in the freak show, ridiculing him as "the average man", a naïve weakling doomed to insanity.
Batman's attempts to locate Commissioner Gordon are unsuccessful until the Joker sends him a clue that leads him to the amusement park. Batman arrives to save Gordon, and the Joker retreats into the funhouse. Though traumatized by the ordeal, Gordon retains his sanity and moral code, and he insists that Batman capture the Joker "by the book" in order to "show him that our way works". Batman enters the funhouse and faces the Joker's traps while the Joker tries to persuade his old foe that the world is "a black, awful joke", and thus not worth fighting for. He also states that it takes only "one bad day" to turn an ordinary man insane. He also taunts Batman by speculating if it was one bad day that drove Batman into becoming a vigilante. Batman tracks down and subdues the Joker, and tells him that Gordon survived everything he suffered at the Joker's hands, and suggests that the Joker is alone in his madness. Batman then attempts to reach out to the Joker and offers to help his old foe recover and put an end to their everlasting war, which Batman fears may one day result in a fight to the death. The Joker declines, ruefully saying it is too late for that. He then says that this situation reminds him of a joke:
See, there were these two guys in a lunatic asylum... and one night, one night they decide they don't like living in an asylum any more. They decide they're going to escape! So, like, they get up onto the roof, and there, just across this narrow gap, they see the rooftops of the town, stretching away in the moon light... stretching away to freedom. Now, the first guy, he jumps right across with no problem. But his friend, his friend didn't dare make the leap. Y'see... Y'see, he's afraid of falling. So then, the first guy has an idea... He says 'Hey! I have my flashlight with me! I'll shine it across the gap between the buildings. You can walk along the beam and join me!' B-but the second guy just shakes his head. He suh-says... He says 'Wh-what do you think I am? Crazy? You'd turn it off when I was half way across!
Batman's stoic exterior breaks down and he laughs along with the Joker.
Read more about this topic: Batman: The Killing Joke
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