This is, of course, a fascinating quote if true, so I had to try to track it down. There doesn't seem to be any traceable source for those particular words, but it could be a paraphrase by someone else of some things he wrote in the Letters about the variegated nature of both sides of the real-world war:I was always fascinated by Orcs since i saw the bakshi movies as a child... i still think his orcs are really frightening and nightmarish.
Tolkien once stated "we were all orcs in the war (WW1)". So i think of Orcs as the element in humans which is frightening, because they represent things humans are capable of doing but we usuually do not see or realize, and like to think of as not possible.
In real (exterior) life men are on both sides: which means a motley alliance of orcs, beasts, demons, plain naturally honest men, and angels. But it does make some difference who are your captains and whether they are orc-like per se!
Letters, #71 (p. 82 in the hardback edition that I have)