I've actually discussed this with David in the past. I use a "dual system" of reference filing.
For current reference filing, the stuff I need immediately at hand, etc., I have two two-drawer file cabinets immediately to the right of my desk. This will sound familiar to the initiated, but in the top left-hand drawer I have my tickler file and a big supply of new, unused manila folders. Starting in the lower left-hand drawer and continuing in the upper and lower right-hand drawers (in that order), I have my immediately-at-hand general reference files, organized alphabetically. I'm the only one who does any filing in that drawer, and I purge the files -- or move them to long term storage as discussed below -- once a year (right after Jan 1 each year).
Also in my office, across the room, are two three-drawer metal lateral filing cabinets. I'm a lawyer, and my firm really likes these lateral cabinets. I even had to have one of our maintenance staff build me the two two-drawer cabinets mentioned above to match our furniture (and to fit partially under the right side of my desk). Anyway, for those metal filing cabinets I use a combination of hanging file folders and the Paper Tiger file management software. That software -- which resides both on my office desktop and my laptop, and which I sync from time to time with my Treo, so the info is always at hand -- helps me track longer term storage stuff -- i.e., the things I know I don't need immediately at hand, but may need someday: e.g., software license keys and user manuals, reference materials from the continuing legal eduction seminars I have to attend every year, etc., etc. These cabinets also hold some stuff I "purge" from the shorter-term cabinets, if I think I may need to refer to the stuff "someday."
One of the nice things about the Paper Tiger software is that you can type in as many keywords as come to mind for each folder. Each folder then is just numbered, starting at 1 and going as high as you need -- and you can add more as you need them, or dump the contents of an existing folder and replace those contents with a completely unrelated set of materials. Then, if I need to find, say, the license keys for various software, all I have to do is type into Paper Tiger's find box the name of the software, or whatever other key word I can think of, hit enter, and the software immediately tells me what folder it's in.
I have it easier than some folks, because I have a secretary. She long ago made up 200 hanging file folders with numbered tabs. Right now, we've used 162 of those. If I get something that needs to be filed in a folder we're already using -- info about an upgraded version of software I'm already using -- I just write the number of the existing folder in the upper right hand corner of the paper, toss in my "To Kim" box, and she files it in the right place. If I get in something new that doesn't yet have a place, I select one of the unused folders in the Paper Tiger software, type in a few keywords, write the number of the new folder in the upper right hand corner of the paper, and toss it in the same box. It takes a whole lot longer to describe how this works than to use it. It's very fast. Among other things, it also allows me to type in tons of keywords, so if I go to a seminar on Commercial Leasing, and the speakers talk independently on 15 different subjects, I can enter key words for all the different subjects -- assignment and subletting, estoppel certificates, leasehold mortgages, etc. -- then if I have a problem and want to know if I have any materials that might help me on that issue, I just search on a key word or two and, like magic, I get the results that point me to the right book in the right folder. (These seminar materials typically come all bound together, so it wouldn't be a simple process to divide the materials up into separate folders.) I also usually insert the names of the speakers in the keyword section for those materials, because sometimes I can remember hearing a particular person present on a subject, so I can search on that person's name.
I've been using the Paper Tiger software for a number of years now -- before I'd ever heard of GTD -- and it makes life a whole lot easier.
So, yes, I do use hanging folders for certain purposes, though for my right-at-hand stuff (both in the office and at home) I prefer the old manila folders in letter sized file drawers.
Randy Stokes