Lyric discussion by LaughingLynx 

I view it as being sung to a new-born baby, possibly one whose older sibling died ('do battle with ghosts at play', keeping in mind how siblings have a tendency to fight) (morbid of me, I know); the parents know that harm can befall children (little birds can't fly, it's as well we tell no lie). Even though there are locks and chains and guard dogs, unseen things can snatch a child ("dragons & beasties" = SIDS, illness); it's a dangerous place so be on guard. I find it a rather sad song, as it disabuses the illusion of childhood innocence, where everyone lives "happily ever after" and "nothing bad can happen to baby".

Per the cup of wonder website, though, it has to do with the rise of fascism in Europe.

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