It's no good saying what you think ought to have happened in history. Things did happen, whether they were Good Things or Bad Things. Maybe the traddies should have embraced the new. But they didn't.Or to be precise, a lot of them did, but a lot of them didn't. People left, and not enough new blood came in to replace them, overall. Obviously in some clubs things worked out fine, but not in all. So there was a decline. Arithmetic, not right and wrong. Yes, it would have been lovely if everyone had liked all the new songs being written and everybody had loved each other. But you can't make people like contempoarary folk if they like old folk and new rock taste is not a matter of argument or compulsion.
   I was not part of that change, one way or the other. In the 70's and 80's I was writing new music, but not in folk clubs.And I was playing trad music for dancing, not for listening to in folk clubs. I was no folk nazi saying what should be sung, neither was I a singer song-writer inflicting my diary on others(to take the two stereotypes that get trotted out in these arguments). But I did observe what was going on, from a distance.
There are places to play folk music in other than folk clubs and folk festivals: the places folk music has always been performed. Taking a broader picture than just the folk clubs, I'm sure the audience for folk music is larger and more diverse now than it was in 1965.