Scabbards - Goes in belt slot, holds swords.
Leather straps - can be attached to shields, B12 axes, and other unwieldy or two-handed weapons (not bows), allows you to carry said item on your back. Bows can be simply slung over you if they're actually large enough.
Weapons are not held in hands except when combat is activated because seriously, who the fuck goes around with a sword and shield on their hands everywhere?
Now that the hands are free, hearthlings should be allowed to carry extra items on their hands even if their backpack is full:
1 hand per item if item is not terribly unwieldy (8 slots or less in inventory), two hands per item if it is (over 8 slots); this means that carrying giant pumpkins takes both hands, while carrying a plank or a backpack takes one hand a piece.