Based on the classic 19th century tale by German writer/composer E.T.A. Hoffmann, the film investigates the tale's themes of obsession and madness, emphasizing expressionist imagery and theatrical style. The story relates the life of the young student Nathanael, whose childhood memories are haunted by a sinister man. As a child, Nathanael believed this dark figure to be the mythic Sandman, who puts children to sleep by stealing their eyes. When confronted by this same evil presence as an adult, he is pushed toward madness as he tries to confront his childhood fears.
A strike for better wages puts machine fitter Dieter Wittowski in financial difficulties. This upsets his plans for the future and brings his wife a step closer to self-realization, as she now accepts a more responsible job against his will. There are also disagreements with his father, whose blacksmith business he describes as a supplier for mass sales.
East Berlin, shortly after the construction of the Berlin Wall. Kurt Schröder and his family dig a tunnel to escape to West Berlin as they struggle to overcome the obstacles blocking their underground path to freedom.