I posted the history on this song a gazillion years ago on the IMDb thread, but of course, that has long since vanished.
Back in 1960/1961, Bob Dylan showed up on the Guthrie family doorstep in NY, looking to meet Woody. Arlo (who was 13 at the time) answered the door and explained that his father was in the hospital. Woody Guthrie, at that time, was in suffering from Huntington's Chorea and spent the last decade of his life in a psychiatric hospital.
Dylan visited Woody in the hospital and began writing songs shortly after that. On November 20 and 22, 1961, Dylan recorded a number of songs, many of which became his debut, eponymous album, "Bob Dylan." "He Was A Friend Of Mine" was actually recorded at that time but not included on the LP. It was not released until 1991, on "The Bootleg Series, Vol 1-3."
Dylan did sing the song in concert and people were familiar with it. There are a number of other cover versions (including Willie Nelson's which is the most recent) that have been released over the years. including The Grateful Dead, Jerry Jeff Walker, and The Byrds, who turned it into a tribute to President Kennedy after his assassination.
Leslie