...it was his contention that I no longer need to humidify my old Guild, as it is so old by now and totally settled...
{Can't resist...} "Indeed, just as older cars no longer require motor oil, older horses don't need groomed, and older people don't have to brush their teeth any more, now that they have settled.
And everyone knows that a vintage guitar (the more expensive, the better) can hold out significantly longer underwater in a flooded basement than can some brand new, unsettled guitar. By a factor of weeks and weeks, I am sure." {...end sarcasm}
For our purposes, Humidity, the measurement of moisture content (water vapor) in the air, and it's close cousin Relative Humidity, the ratio of water vapor to air at a given temperature, can have a very deliberate impact on a wooden acoustic guitar (Carbon Fiber guitars are near-impervious to Humidity).
When the air feels "dry", the humidity is considered to be low. In such an environment the wood of the guitar will contract or shrink across the grain. This can be so pronounced on some fretboards, which are approximately 2" wide, you can actually feel the metal frets projecting slightly beyond the edges of the fingerboard. In severe cases, the guitar top or back, which often span 14" to 17", can contract 1/8" or more which usually results in a crack or split, as Al referenced. Another indication of low humidity (too dry of an environment) can be sudden fret buzz, typically caused by a collapsing, concave top as the braces and neck block are contracting.
Too moist (humid) of an environment, where humidity is high, can also have detrimental effects. As the wood takes on moisture and expands, the entire top and back can belly, raising the action. Under severe conditions, glue joints can fail (loose braces, forward shifted neck, etc) and the guitar can become unplayable.
If you are humidifying your guitar in it's case, and you are noticing that your guitar's action is raising after such a treatment, rather than assume that you are "over-humidifying" the instrument, I would suspect it is "under-humidified" in it's normal state. That is to say, the air in your home is too dry. Placing the guitar in a case with some moisture is allowing it to return to the conditions under which it was likely constructed. Make sense?