The Cabinet of Dr. Caligari (1920)

The most striking thing in this german silent expressionist film is the set design, mostly constructed from painted canvas.  This helps create an atmosphere of madness and unreality, as the painted sets are full of distorted perspective and lighting.  In this world, the actors stand out through looking "realistic", standing vertically in defiance of the skewed verticals of their background.  This effect is enhanced by the distorted proportions of the furniture they interact with, such as the town clerk perched on a stool almost as tall as he is, hunched over to fit in the top of the screen.

As Julia Merriam of Classic-Horror.com says, "The image of three-dimensional people walking through this starkly two-dimensional world is disorienting, making the universe within Caligari seem slightly off-kilter", an effect that serves to emphasise the fact that almost all of the film (except for the very beginning and end) is in effect a flashback, a story told by the main protagonist Francis (Friedrich Feher).  The fact that the non-flashback scenes are portrayed using realistic sets further serves to separate them from the main body of the film.
It is important to remember that the flashback is told through the eyes of a madman, and this perhaps helps to explain why the director chose to make the stylistic choice he did; the twisted sets help convey to the audience the "otherness" of the reality that Francis is living in.  I believe that this effect was best described by the original Variety film review, which said "Robert Wiene has made perfect use of settings designed by Hermann Warm, Walter Reimann and Walter Roehrig, settings that squeeze and turn and adjust the eye and through the eye the mentality." a description that captures the way the film distorts your view of the world within as you watch it.

The visual style of the film has rarely been imitated since, although its influence can be traced through to modern film makers such as Tim Burton, and the idea of using a twisted version of reality to convey that something is not literally real has been embraced by directors working on dream sequences and hallucinations throughout film history.  Overall, the film is best summed up for me by Nick Hilditch in his review for the BBC, who said ""Caligari" creates a charcoal-drawn world...The shadowy symbolism...showing that cinema was well suited to fabulous psychotic dramas. It is such an apt use of the medium as it existed in the first quarter of the 20th century that it is difficult to imagine the film done better with the benefit of sound, colour, or any innovation since."