I have to admit I was lazy, and just bought pads for my girls. I figure even though it cost a bunch up front, it's WAY cheaper than buying disposables every month, especially because I refuse to have them using the normal chemically ones.
Personally I like a fleece (or similar) layer on top so that it doesn't feel wet. I got some flannel and some fleece topped when I first started using them, and decided I prefer the fleece, so that's what I got for the girls too.
Yes, knitting or crocheting would be with cotton yarn. . . now I'm intrigued by that whole idea