I've known this song for fifty years, and have heard a number of versions, and I never heard "and I BUT a pocketknife". Nor even any such discussion.
The fact is that the lord is there, armed, and Matty Groves has been just roused from bed. Where's he got a knife? Stuffed up his bum?
And the lord says words to the effect, "Never will it be said that I slew a naked man." He's not talking about Matty's state of clotheslessness. A "naked man" in this context is a man with no weapon.