Wee little drummer
Just to clear things up - In the time I have been involved in folk music I have been a floor singer, a club resident, an organiser, a chair shifter, a doorkeeper - and all the things that go into the running of a club. The books are - and have always been part of what I do.
Over the last few decades I have been involved in research, mainly in collecting.
Please don't think that any experience and knowlege comes from a bookshelf.
One of the great myths that has created confusion around terms like 'folk' and 'tradition' is that our traditional singers never discriminated in the type of songs they sang, so why should we. THIS IS NOT TRUE. The fact that has given rise to this myth is that nobody really bothered to ask them.
Our experience has been very different. I suggest you read the article I put together in the enthusiasms column of Musical Traditions - not for anything I have to say, but for what one of our best (and last) traditional singers, Walter Pardon (and others) thought on the issue.
You are right of course that lack of skill (and application) played a part in the exodus away from the clubs, but I know what sealed it for me was the time I went to a folk club and didn't hear a folk song, confirmed not so long ago by being told of a club in the North of England that put on an evening of Beatles songs! I know I am not alone in holding this opinion, I personally know of many others and there have been enough people on various threads on this forum echoing my opinion.
I think your dates for the exodus are a little out. Sure - there was a dip in attendances after the folk boom - when the singing pullovers went their various ways, but right into the eighties I still had to wade through columns of clubs in Time Out and Melody Maker to decide which one I would visit. My wife could, and did, arrange bookings for singers like Paddy Tunney, John and Tim Lyons and other traditionally based singers, and I could, if I wished, leave a superb evening of ballads at The Singers Club and walk for ten minutes to hear Gordon McCulloch and Bobby Campbell singing at The Metropolitan.
Topic was spending money as if it was going out of fashion, putting out excellent albums of traditional singers and Neil Wayne, Dobell's and Collets had shops exclusively for the sale of folk music on record. For a time even EFDSS had a shop!
Folk music has never really been a majority interest, but the the clubs were, not so long ago, financially viable.
In the end it boils down to our motives for being involved. I signed up to hear good traditional songs well sung, and I hoped that the poetic and musical forms I was listening to would form a template for the creation of new songs equally as good and relevent as the old ones. That was happening for a time - it no longer does.
I measured my success by the number of new people I saw being drawn into the clubs   
For me, the great failed experiment was the 'anything goes' club, based on the false premise that by including all types of song at the clubs would draw in an audience for the real thing. It doesn't work - and there's no reason why it should.
Personally I'm into folk song, because that's what I like and that's what I would like to pass on. If I can't do that, I've (we've) failed and I'll stay at home listening to my recordings, and leave what information and music I have gathered for posterity for them to make up their own minds as to whether it has any relevence to them.
By the way, I was puzzled by your "hold hard to our national identity" reference. As somebody who was born in England, with a strong liking for Scots songs and ballads, who has researched and is now living in Ireland and is highly partial to Eastern European singing, I'm not sure where the 'national' bit comes from.
Grab;
Of course fusion and crossover takes place - no reason why it shouldn't. It's just that I would like to be given the choice of listening or not listening to it by being told what I am paying my entrance fee for. It's a long time since I went to a jazz club (a bit thin on the ground here in the West of Ireland). The clubs used to make clear what they were and did exactly what it said on the tin - maybe they don't any more.
Goodbar
Of course anybody can and should be able to play what they want - it's never been a case of what they play, but where they play it and what they call it.
Who the **** cares? As a punter who turns up to hear folk music and arrives to find some Onenist whispering something not remotely resembling what I had in mind into a guitar and giving the impression that he wishes we'd all go away and leave him at it, I ******* care. That's not folk music as I have come to understand it.
Anybody has the right to play and sing whatever they wish; I as, say, a club organiser, or a club regular - or just somebody interested, equally have a right to tell them to sling their hook and go and do what they are doing somewhere else.
Jim Carroll
PS Richard - thanks for the information on the clubs that auditioned their floor singers - I never gave it any credence and always had the sneaky feeling it was a sideswipe at MacColl and The Singers Club - thank you for putting me right.