Why doesn't OctoPrint allow me to create folders on my printer's SD card?

Because there's no command to do that.

Current printer firmware usually has commands to

  • fetch a list of DOS file names from the printer (hence also the test~1.gco names you see in OctoPrint): M20
  • initialize the SD card: M21
  • release the SD card: M22
  • select a file for printing: M23
  • start a print: M24
  • pause a print: M25
  • set the position in the file to print: M26
  • query the current printing status: M27
  • start and stop sending commands into a new file: M28, M29
  • delete a file: M30

Some firmware variants also support:

  • report time since begin of SD print: M31
  • select and immediately start printing a file: M32
  • fetch long name of one file on the SD: M33

As you see, there are no commands to create or manage folders in any way.