I find it entirely plausible that a mother can be utterly embarrassed by what her daughter did, yet want no ill to befall her grandchild. Why would you think the two things would be mutually exclusive?
I also think that over time those very likely racist white grandparents came to love their mixed race grandchild.
And how would they know that he wouldn’t acquire American citizen from her daughter?
Because Madelyn was no fool. It would probably take her less than a day to find the answer to that question back in 1961. The law at the time would have rendered him not an American because his mother hadn't met the residency requirements specified in the 1952 naturalization law. She wasn't old enough to meet them.
For that matter, if her daughter was sent to Canada to have her baby, Madelyn may have had several months to look up the pertinent law prior to his birth. I expect they had copies of the naturalization act of 1952 in Honolulu back in 1961.
“yet want no ill to befall her grandchild.”
You consider being Canadian to be an ill? LOL