We all live in our dreams, we do not live only by day. Sometimes we
accomplish our greatest deeds in dreams.
He ventured this statement as a reflection on one of his own puzzling dreams, the killing of Siegfried.
This is the way he told that dream in his autobiography, Memories, Dreams, Reflections:
I was with an unknown, brown-skinned man a savage, in a lonely, rocky
mountain landscape. It was before dawn; the eastern sky was already
bright, and the stars fading. Then I heard Siegfried's horn sounding over
the mountains and I knew that we had to kill him. We were armed with
rifles and lay in wait for him on a narrow path over the rocks.
Then Siegfried appeared high up on the crest of the mountain, in the
first ray of the rising sun. On a chariot made of the bones of the dead he
drove at furious speed down the precipitous slope. When he turned a corner,
we shot at him, and he plunged down, struck dead.
Filled with disgust and remorse for having destroyed something so great
and beautiful, I turned to flee, impelled by the fear that the murder might
be discovered. But a tremendous downfall of rain began, and I knew that it
would wipe out all traces of the dead. I had escaped the danger of discovery;
life could go on, but an unbearable feeling of guilt remained.
What is this guilt? And why did he want or need to kill Siegfried? Think again about his earlier words: "We also live in our dreams, we do not live only by day." And so, I wondered, what was Jung living in this dream? The time of the dream was December 18, 1913, and in his personal life, Jung described the moment as a "confrontation with the unconscious," a "period of inner uncertainty," a "state of disorientation," as if feeling "totally suspended in mid-air." (MDR, p. 170)
Jung is in turmoil. Why? As I will show, the reason for his inner upheaval is two-fold. The first reason is because of the break in his relationship with Sigmund Freud; and the second reason is because of the creeping catastrophic events in Germany.
One year earlier, Jung had suffered a traumatic break in the relationship with Freud. The tension between these two pioneers in the young psychoanalytic movement had accelerated for years, marked probably with a dinner together in 1909, when Freud's mistrust of Jung reached a point of leading Freud to believe Jung harbored death-wishes toward him. Then, in ways historians have pondered since that time, neither of the men could or would find a way to resolve their conflicts occurring within what once had appeared to be a positive father-son relationship. Finally, in his letter of January 3, 1913, Freud took the decisive step of proposing that "we abandon our personal relations entirely." Responding in his letter a few days later, Jung completed the closure of their relationship with words borrowed from Hamlet's soliloquy: "The rest is silence."
Even now one and one-half centuries later, I find this exchange of letters reeks of death. How could they not have lingered in Jung's memories and dreams? But this is not the reason for his stated guilt at having killed Siegfried. After all, Jung did not kill the relationship with Freud, nor vice-versa.
And so we turn to the second reason for Jung's inner turmoil. Jung killed Siegfried, not Freud nor the relationship with Freud. This Siegfried was the symbol of Jung's personal attitude and posture of heroism and power. This mythical image of Siegfried had come to symbolize Jung's egotism. His adoption of this attitude was an understandable connection, because Jung had become inflated with his own personal accomplishments, while Siegfried was "the warrior hero of Germanic medieval epics."  In one of the mythological stories, Siegfried kills a dragon and then is himself killed. This is a theme developed by Richard Wagner in the third drama of his Ring cycle.
But Siegfried also represented the uncontested collective complex that had seized Germany prior to World War I. At the center of that complex was the archetypal drive for power. Under Wilhelm II, the German kaiser, Germany followed the path of imperialism, militarism, and nationalism in alliance with Austria-Hungary and Italy (until 1914). Opposed by what would become known as the Entende alliance of France, the United Kingdom, and Russia, Europe became caught in a death spiral that would culminate in World War I and the cumulative deaths of seven million civilians and ten million military personnel. 
It was this dark, foreboding mood possessing Germany that haunted Jung, arising from the power complex, a complex Jung came to see as the obsessional drive of his own ambition. This frightening, repulsive drive was hidden, of course, in the deep, shadowy recesses of his unconscious.
But the truth wants to be made known. Propelled by the more dominant drive toward the realization of health and wholeness, we have to reckon in our dreams with the demonic powers that can possess us. "Health" pushes against "disease;" the "moral perspective" battles with the urge toward chaos, conflict, destruction, domination. We may ignore these inner struggles, and when they appear in our dreams -- as they will -- we may dismiss them as nightmares to be discarded as quickly as possible.
So it is to Jung's credit that he took note of the dreams and visions that disturbed him so consistently during that period of 1912-mid-1914, when World War I was incubating. Among those frightening images in his psyche were these: 
- "a monstrous flood" with the "floating rubble of civilization," the "drowned bodies of countless thousands," the "sea turned to blood."
- "rivers of blood"
- "the land turned to ice," "all green things turned to frost," "the entire region deserted by human beings"
- an "active imagination"  in which he let himself "drop" into the depths of his unconscious that was experienced as a cave with icy water, a dwarf, a youth with blond hair and a wound in the head, a "gigantic black scarab" and "a red, newborn sun" 
But another war Jung was experiencing was within himself. Not only was Europe and the world attacked by a Germany fueled by the archetypal power complex of Siegfried; Siegfried also existed within Jung. This is why he was so troubled by his dream and why he had to come to this realization:
"Why, this is the problem that is being played out in the world." Siegfried,
I thought, represents what the Germans want to achieve, heroically to impose
their will, have their own way: ... I had wanted to do the same. But now that
was no longer possible. The dream showed me that the attitude embodied by
Siegfried, the hero, no longer suited me. Therefore it had to be killed. 
This act of killing Siegfried in Jung's dream throws light on what he meant when he said, "Sometimes we accomplish our greatest deeds in dreams." In the case of this dream, Jung had the support of the brown-skinned man who represented a force deep in the unconscious. And then there was the rain, a symbol of cleansing power from the "heavens" that renews the earth and offers absolution of his conscience. It was as if Jung's heroic deed of killing Siegfried was being validated by a higher morality in his deep unconscious. That is to say, he was not acting solely from the vantage point of his ego.
Our dreams are laboratories of life lived and unlived, adventures undertaken and possibilities never attempted. What a paradox! As frightening as dreams may be sometimes, as exhilarating as they appear at other times, and as mundane as they may seem to be most times, they are always images of our world and our deeds. And sometimes, during moments of national unease, they come to us as warnings about our personal as well as collective attitudes, attitudes that may have to be sacrificed in order that life may go on and the world be renewed.
1. Liber Primus fol. IV (V)/V (r)
2. The American Heritage Dictionary (Fifth Edition)
3. Later, the United Sates, Japan, and finally Italy would join the Entende alliance.
4. See Jung's Memories, Dreams, and Visions, pp. 175-194.
5. "Active imagination" is a term used by Jung to describe the intentional act of allowing
oneself to descend into an image or vision with no effort to project upon the outcome
of what one will experience in this encounter with previously unconscious elements in
in one's psyche. See Collected Works, Vol. 14, par. 706.
6. Memories, Dreams, Reflections, p. 179.
7. Memories, Dreams, Reflections, p. 180.