I have 3 knobs... hot water cold water and to turn the shower on is in the middle.

That middle knob is your diverter and its seal is shot. Do you know the brand or can you post a pic? Most can be rebuilt for a few $$

I can post a pic when I get home this evening but this house is 30+ yrs old and the bathtub doesn't look any younger.

Most of the 3 knobs faucets looks like the images below, as Ballenger (Bob) says the problem is with your diverter washer, remove the stem and the washer at the end of the stem take it to a Home depot or Lowe’s get a replacement, I would suggest to replace all 3 Hot, Cold, and Diverter washers at this time, Thanks.

John