<1) was Larrys post a real threat or figurative?

Only Larry could convince me that the trench knife comment was anything other than figurative.

2) depending on the answer for #1, should this be allowed here?

Frankly, when it comes to cyberspace, I'll take physical threats over personal insults any day. The cyber punch in the nose is painless compared to the infinite possibilities of the insult. "The pen is mighter than the sword" (or trench knife). Physical threats are wasted on me. Where I come from we kick each others ass.

3) what should be done about any wrong done?

For the benefit of both parties, any admonishment by a moderator should be done via email. Apologies, retractions etc. can be better arranged privately so that it may at least appear to be voluntary instead of a response to a threat of banishment. Also, in a private exchange the matter may be totally resolved by explanation. The first law of management is, never chastise people in public.