The individual musicians, famous in the '20s, who played Dixieland in the '30s and '40s - guys like Wild Bill Davison, Bud Freeman, Jimmy McPartland et al - actually improved as soloists right into their dotage. BUT the music fell apart structurally in those years. By the late '30s, gone were the intricate arrangements and fine orchestral details, leaving most of the dixieland players falling back on their individual talents. It's obvious when you compare "Smiling Skies" by Benny Meroff (featuring Wild Bill Davison), or "Craze-O-Logy" by Bud Freeman and his Orchestra (both OKeh, 1928) to their work from ten years later on Commodore.
The great hot music of the '20s depended on innovative arrangers, crackerjack soloists, excellent "straight" men, orchestrally informed leaders, and of course the relentless competition of similar bands that kept the bar so high. At its best, there was a fine balance among all these qualities. By the late thirties, that fine balance had largely disappeared, and couldn't be re-created even by the original players. I asked Bud Freeman once if his arrangement of "Craze-O-Logy" took a lot of rehearsing back in '28. He said they worked like devils for days refining those three minutes. Dave Tough said that in the '20s, "Dixieland" was downright dangerous and subversive; by the late "40s, it had become "like the Republican party."