Andrew Grant's book says Hoensha wasn't allowed to give dan grades. Is that inaccurate?
I refer you to
Zain Danso, page 202, for the Hoensha's own words on the topic. For the politics, I'd refer you to my book
The Insha Game, except there seems to have been some delay by Slate & Shell in issuing it.
In brief, though, two main factors to bear in mind are that in the Meiji era the Honinbo family was on the wane and was being challenged by several new organisations, of which the Hoensha was only one (i.e. tradition was less of a force), and that, with the new democratisation of the time, the go world was on the verge, for the first time, of recognising amateurs properly. Part of Shuho's genius was to understand the latter point very well. Previously, the best an amateur could hope for normally was a 1-dan diploma on the pro scale. Below the tiny elite who could achieve that level (and afford the diploma) there was a huge gaggle (us) waiting to be graded. So, essentially, dans were abolished for amateurs, who became kyus on a scale with much more discrimination. I think (without checking) that Shuho may have got the idea for kyus to go with dans from the guy who founded judo just before the Hoensha began, Kano Jigoro.
But Shuho's accession as Honinbo (and the associated politics) and, more to the point, his death soon after, derailed some of the new ventures to some extent. Many others pros were anyway more comfortable with still selling diplomas to a tiny but rich audience.
Mind you, in essence Shuho prevailed. We still have kyus. If you are a kyu player on the start of your go journey, you can proudly call yourself one of Shuho's Babes.