How could temporary surrender of self-government help Newfoundland with its debts?

Essentially, Newfoundland was put into a kind of receivership with its debt extensively restructured and then guaranteed by Britain, who additionally also supplied annual grants-in-aid. Suspending self-rule was a necessary component of securing the British bailout. It was not otherwise inherently helpful.

The onset of the Great Depression in 1929, and the subsequent collapse of international trade, spelt financial doom for Newfoundland's export-oriented economy. By 1932, the Dominion was on the brink of defaulting - debt servicing consumed 63.2% of the government expenditure. Yet, even when times were good, the government at St John's relied heavily on borrowing to finance itself:

By the 1920s, however, government increasingly resorted to loan flotation to cover persistent revenue shortfalls. Each year between 1921 and 1932, a loan was raised, ballooning the debt from $43 million to $97.5 million in just twelve years. The debt was exacerbated by a succession of capital projects that were likely necessary and undoubtedly expensive to complete. As a later report put it, "among the projects ... financed [with loans] may be instanced the construction of a dry dock, the building of high roads, the taking over and improvement of the railway, the expansion of the telegraph and telephone service, the provision of steamers for coastal services, and the construction of numerous public work buildings. Unfortunately, none of these projects has proved remunerative."

_{Mussio, Laurence B. Whom Fortune Favours: The Bank of Montreal and the Rise of North American Finance. McGill-Queen's University Press, 2020.}

This last sentence illustrates the prevailing opinion at the time, that Newfoundland had been run into the ground by reckless spending and fiscally irresponsible politicians. Consequently, there was no bailout forthcoming from the rest of the British Empire, without attached conditions of some form of external supervision. For example, when the Amulree Commission was first set up, the Dominion Office envisaged a scheme where London would control Newfoundland's taxation and spending level, with British officials supervising Dominion government departments. They naively thought a term of three years would be enough.

Frederick Alderdice, Newfoundland's Prime Minister at the time, preferred to just default. He drafted a plan to exchange existing Newfoundland bonds to a new series with a long maturity date and 2% interest rate. St John's approached both London and Ottawa to guarantee the new bond issue in exchange for Labrador, and for a $2 million advance to cover interest payments in the meantime.

Britain promptly declined. No part of the British empire had ever defaulted on its debt before, and with the global economy in shambles from the Great Depression, policymakers in Whitehall were not willing to countenance the idea now.

Chamberlain . . . felt a unilateral default "would be so damaging to Imperial credit that we ought to take all possible measures to avert its consequences." . . . He then laid out the political side of the plan, one that would allow the "Mother country" to save face with the bondholders on a "technical default" because "the system of government under which the default had arisen would for the time being have ceased to function.

_{Long, Gene. Suspended State: Newfoundland Before Canada. Breakwater Books, 1999.}

Still, Britain would rather not intervene, let alone pay for the cost of running Newfoundland. In the first half of 1933, Whitehall's preferred solution was to dump the whole Dominion on Canada. Meanwhile Canada, though interested in eventual confederation with Newfoundland, was itself under financial stress. As the depression raged on and stress turned into duress, Canadian Prime Minister Bennet decided to turn his back on his neighbour.

Ottawa's withdrawal forced London to assume the full cost of bailing out Newfoundland alone. The British reacted by seeking more direct control over the government of Newfoundland, in order to ensure - and to persuade Parliament - that British taxpayer money wouldn't be wasted. A plan was also hatched for a constitutional restructuring to "disguise" the technical default that would be needed to keep costs down.

Left to carry Newfoundland on their own, the British understandably decided they would need greater political control than previously contemplated in order to safeguard their investment. Alongside their plans for this, they devised a scheme for pressuring most of Newfoundland's bondholders into converting their paper to a new issue at lower interest rates. This, as was understood in Whitehall, was default by another name.

The effect of the conversion would be to lower the cost of carrying Newfoundland's debt, which is what Alderdice had wanted, but by an acceptable means. A unilateral reduction of interest payments would not be justified while Newfoundland was still in business, but a conversion would be legitimate were she, in effect, to go out of business.

_{Neary, Peter F. Newfoundland in the North Atlantic World, 1929-1949. McGill-Queen's University Press, 1988.}

It is worth noting that the Amulree Commission had found that Newfoundlanders were apparently disillusioned with Responsible Government, and would be favourable to direct rule from London. The commission's report was published to general approval when it came out later that year, and the British government's plan sailed through the legislatures of both countries.

[Canada's representative on the commission, Charles] Magrath agreed that Newfoundland should have commission of government, a change which had been advocated by nearly all the witnesses who had appeared before the Royal Commission.

_{Neary, Peter F. Newfoundland in the North Atlantic World, 1929-1949. McGill-Queen's University Press, 1988.}