With this bit of mystery thickens the plot of the souls' voyage to perdition. The "after-hold" is two levels below the Pequod's deck, just beneath the captain's living quarters -- a good place for Ahab ("our old Mogul") to hide his mysterious crew of Parsees, enough of them to man his own whaleboat.
The dialog occurs during the night, during the "middle watch" -- probably a four-hour tour of duty from midnight to 4 AM. We have all heard the expression "scuttle-butt". Now we know where it comes from. A butt is a large container for liquid, usually over one hundred gallons -- of fresh drinking water in this case. The so-called scuttle-butt was the one located near the scuttle, the narrow staircase leading from the quarter-deck down to the captain's cabin. The crew of the middle night watch were busying themselves with a bucket-brigade to fill that container where the mates would socialize and swap rumor and gossip.
A sailor named Archy picked up that bit of scuttle-butt one morning watch, overhearing Stubb tell it to Flask. As he passes buckets in the moonlight to Cabaco (a Cholo or half-breed of Spanish and Peruvian-Indian descent), Archy passes on the scuttle-butt -- but Cabaco isn't buying it.. "Aye, you are the chap, ain't ye," says Cabaco sarcastically, "that heard the hum of the old Quakeress's knitting-needles fifty miles at sea from Nantucket."
Melville achieves a nice sense of atmosphere, saying, "From hand to hand, the buckets went in the deepest silence, only broken by the occasional flap of a sail, and the steady hum of the unceasingly advancing keel." It is in this nocturnal moonlit silence that Archy is sure he hears sounds of sleeping sailors coming from the lower depths of the Pequod's hold. Indeed he does. They will appear in due time.