my assumption is that it had the same fate as many other rhymes and fairy tales, which is that it was originally an adult song with adult subject matter. for instance, ring around the rosey is about the plague, and rock a bye baby is about a baby falling out of tree... etc. eventually adults get sick of them or forget where they started and pass them on to the kids and the meaning is lost. i'm guessing in this rhyme, the person that is "down by the bay" doesn't want to go home because his mother is talking about crazy things, like whales with polka dot tails, possibly due to drugs or alcohol. that's my interpretation, i could be completely off the mark...