Like a lot of old time legends, this is true to an extent. You can make a knife out of an old file but it certainly is not the best material for a blade. File steel is compounded to be hard when tempered; it is about 1.5% carbon. Hard steel such as that will hold an edge but unless the blade undergoes a differential tempering process it will be extremely brittle. Most files are brittle; at least more brittle than is desirable for a knife blade. Grinding a knife from a file retains the brittle nature of the file in the knife blade. Annealing and tempering are required to produce a reasonable knife from file steel; or any carbon steel for that matter.

IMO, the best carbon steel for a knife blade is that used for saws. It is about 1.0% carbon, can be hardened to hold an edge but still retain the toughness (lack of brittleness) that makes a good knife blade.

I am convinced that if one wants a knife that will hold an extremely sharp edge, it is hard to improve much on good carbon steel. But, if you look at the steel used in surgical instruments, it is almost always some type of stainless. Modern stainless alloys can hold an incredible edge but not one that will hold up to the types of use to which a pocket or sheath knife is intended.