How does Mark Twain use dreams in "The Mysterious Stranger"?

Mark Twain's use of dreams in the story "The Mysterious Stranger" is complex and at times delves into somewhat tricky philosophical territory. 

The story, on its very entertaining surface, is about the exploits of the Angel Satan in an unnamed Austrian village during the year 1590.  Explicitly, Satan sows deceit, treachery, and murder in the village--cruelly influencing the suffering of its citizens.  Twain suggests that this is not quite what it seems, however, as the...

Mark Twain's use of dreams in the story "The Mysterious Stranger" is complex and at times delves into somewhat tricky philosophical territory. 

The story, on its very entertaining surface, is about the exploits of the Angel Satan in an unnamed Austrian village during the year 1590.  Explicitly, Satan sows deceit, treachery, and murder in the village--cruelly influencing the suffering of its citizens.  Twain suggests that this is not quite what it seems, however, as the alias Satan uses while interacting with most of the villagers is "Philip Traum." The narrator informs us that "Traum is German for dream."  With metaphorical flair, Twain seems to be implying that Satan is at best a convenient fiction used for justifying the wrongs and suffering we inflict on one another, and that such convenient superstitions are in fact dreams.

In the case of the villagers in Twain's story, this does indeed seem to be the case. Although Satan plants certain seeds and stokes the flames of misery, it is the villagers who must take credit for the atrocities in the village. For example, many accused witches in the village are stoned and burned by the villagers, who fear that if they do not participate in the barbarities, they themselves will be suspected as witches or witch sympathizers.  It is not Satan, but the cowardliness and fear of humanity that contributes to their vile acts.

However, Twain's look at the nature of dreams does not end there.  The final chapter of the story is an explicit philosophical statement about dreams and reality.  Satan reveals to the narrator, Theodore: "There is no other [life]."  He then goes on to expound:

"Strange, indeed, that you should not have suspected that your universe and its contents were only dreams, visions, fiction! Strange, because they are so frankly and hysterically insane—like all dreams: a God who could make good children as easily as bad, yet preferred to make bad ones; who could have made every one of them happy, yet never made a single happy one; who made them prize their bitter life, yet stingily cut it short; who gave his angels eternal happiness unearned, yet required his other children to earn it; who gave his angels painless lives, yet cursed his other children with biting miseries and maladies of mind and body."

Here, again, Twain relates religious myth and superstition with dreams, implying their unreality.

Twain takes this exposition on the nature of dreams and reality even a step further in the final paragraphs of the story, where Satan says:

"It is true, that which I have revealed to you; there is no God, no universe, no human race, no earthly life, no heaven, no hell. It is all a dream—a grotesque and foolish dream. Nothing exists but you. And you are but a thought—a vagrant thought, a useless thought, a homeless thought, wandering forlorn among the empty eternities!" 

Although many critics have found this sweeping statement to be inconsistent with the demonstrations of the "harsh realities of life" present in the story, it does not seem as inconsistent from a Buddhist point of view, which generally considers all of so-called "reality" a dream, including all the tastes, sights, smells and feelings of pain perceived through the senses.