Listening to this song, I've always had the impression that Margaret is the Dutchman's wife. The line "Sometimes he thinks he's still in Rotterdam" gave me the idea that perhaps he had fought in the Battle of Rotterdam, and that his dementia could be the result of some injury or psychological trauma from that experience. I imagine them as one of those couples who got married right as the man was about to be sent off to fight in the war... Tragically, the Dutchman comes back with his mind destroyed, so they never get to live as a typical married couple, but many years later Margaret still loves and takes care of him.

In any case, I agree that regardless of the inspiration, it's a beautiful, moving song, and listening to it makes me cry almost every time.