Two children (Jemima and Jeremy) are crazy about an old run-down race car (what becomes Chitty Chitty Bang Bang). On the way to ask their father to save it for them, they run into the street, causing a car driven by Truly Scrumptious to swerve into the swamp. Truly is appalled that the children aren't in school, and drives them home to have a word with their father.
Their father (Caractacus Potts) is an eccentric inventor, and doesn't mind that his kids are not in school. His inventions are really fun to see, especially the ones that they show in action. Many of them look like Rube Goldberg inventions.
Truly and Caractacus are obviously falling in love. She helps him pitch an idea for a candy whistle to her father, which ends up going horribly wrong when all the neighborhood dogs show up at the candy factory. He takes her on a picnic with the children to the seashore. The children clearly need a mother and want their father to marry Truly.
The real adventure begins after the picnic when the kids ask their father to tell them a story. That's when grandpa gets kidnapped, and Caractacus, Truly, Jemima, and Jeremy fly away in Chitty Chitty Bang Bang to save him from Baron Bomburst. When they get to Bavaria, they find out that there are no children (the Baroness doesn't like them). So Jeremy and Jemima get captured and locked up in the tower. Their father and Truly must pretend to be toy dolls to help save the children and grandpa.
In the end, everything works out for the best, everyone is happy, and Caractacus Potts finally invents something that works (although not for the purpose he intended).
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