My understanding is that the initial design was intended to fly in space with a ~5psi pure-oxygen environment for the same reasons that previous spacecraft all did, and that American spacewalks today still do: it reduces complexity, reduces weight, and decreases required hull strength. Fire propagation in that environment isn't actually as bad of an issue as you expect because the pressure is correspondingly lower, so their isn't actually more O2 available in the air.

The problem is that the Apollo 1 test was run with both a pure-oxygen environment and a positive relative pressure to the outside, but was run on the ground. That meant a ~16psi pure oxygen environment, which is a real fire propagation issue, meaning materials which were specced not to burn in the flight environment could burn during the test.

That’s slightly misleading. Originally they put 1 atmosphere of pure O2 in the Apollo capsule. This proved to be a great environment for fires. After that they pressurized the capsule with 5 psi of pure O2, which is about 1/3 atmospheric pressure.

From The Earth To The Moon is an awesome series from HBO and the Apollo 1 episode is great, with a great explanation as to why and how it happened.