The script was inspired by various experiences from the lives of Janowitz and Mayer, both pacifists who were left distrustful of authority after their experiences with the military during World War I. The film's design was handled by Hermann Warm, Walter Reimann and Walter Röhrig, who recommended a fantastic, graphic style over a naturalistic one. The film has been characterized as presenting themes on brutal and irrational authority; the destabilized contrast between insanity and sanity; the subjective perception of reality; and the duality of human nature.
The Cabinet of Dr. Caligari was released just as foreign film industries were easing restrictions on the import of German films following World War I, so it was screened internationally. Accounts differ as to its financial and critical success upon release, but modern film critics and historians have largely praised it as a revolutionary film. Critic Roger Ebert called it arguably "the first true horror film", and film reviewer Danny Peary called it cinema's first cult film and a precursor to arthouse films. Considered a classic, it helped draw worldwide attention to the artistic merit of German cinema and had a major influence on American films, particularly in the genres of horror and film noir, introducing techniques such as the twist ending and the unreliable narrator to the language of narrative film.
As Francis (Friedrich Feher) sits on a bench with an older man who complains that spirits have driven him away from his family and home, a dazed woman named Jane (Lil Dagover) passes them. Francis explains she is his "fiancée" and that they have suffered a great ordeal. Most of the rest of the film is a flashback of Francis's story, which takes place in Holstenwall, a shadowy village of twisted buildings and spiraling streets. Francis and his friend Alan (Hans Heinrich von Twardowski), who are good-naturedly competing for Jane's affections, plan to visit the town fair. Meanwhile, a mysterious man named Dr. Caligari (Werner Krauss) seeks a permit from the rude town clerk to present a spectacle at the fair, which features a somnambulist named Cesare (Conrad Veidt). The clerk mocks and berates Dr. Caligari, but ultimately approves the permit. That night, the clerk is found stabbed to death in his bed.
The next morning, Francis and Alan visit Dr. Caligari's spectacle, where he opens a coffin-like box to reveal the sleeping Cesare. Upon Dr. Caligari's orders, Cesare awakens and answers questions from the audience. Despite Francis's protests, Alan asks, "How long will I live?" To Alan's horror, Cesare answers, "Until dawn." Later that night, a figure breaks into Alan's home and stabs him to death in his bed. A grief-stricken Francis investigates Alan's murder with help from Jane and her father, Dr. Olsen (Rudolf Lettinger), who obtains police authorization to investigate the somnambulist. That night, the police apprehend a criminal in possession of a knife (Rudolf Klein-Rogge) who is caught attempting to murder an elderly woman. When questioned by Francis and Dr. Olson, the criminal confesses he tried to kill the elderly woman, but denies any part in the two previous deaths; he was merely taking advantage of the situation to divert blame onto the real murderer.
At night, Francis spies on Dr. Caligari and observes what appears to be Cesare sleeping in his box. However, the real Cesare sneaks into Jane's home as she sleeps. He raises a knife to stab her, but instead abducts her after a struggle, dragging her through the window onto the street. Chased by an angry mob, Cesare eventually drops Jane and flees; he soon collapses and dies. Francis also confirms that the caught criminal has been locked away and could not have been the attacker. Francis and the police investigate Dr. Caligari's sideshow and realize that the 'Cesare' sleeping in the box is only a dummy. Dr. Caligari escapes in the confusion. Francis follows and sees Caligari go through the entrance of an insane asylum.