From 1950 to 1953, Hubbard led the Dianetics Movement, which published, promoted, and provided an alternative talk therapy called "auditing".

In 1950 L. Ron Hubbard published his Dianetics: The Modern Science of Mental Health and started lecturing to audiences about Dianetics technique. The related organizations fell into debt and filed for bankruptcy, during which he lost the rights to Dianetics and his book. Hubbard introduced the "electropsychometer" (or E-meter). Having lost Dianetics, he invented Scientology and Operating Thetan, a level above the Clear state he said Dianetics could achieve. Hubbard decided Scientology was religious in nature and reorganized his Scientology companies into religious organizations. During this time period, Hubbard's [second] wife Sara gave birth to a daughter, Hubbard started showing signs of mental problems, including kidnapping his daughter, after which Sara divorced him, claiming abuse. Hubbard then married Mary Sue with whom he eventually had four more children.

By 1953, Hubbard rebranded his efforts as the Church of Scientology.

Origins of Dianetics in science-fiction "supermen" and false medical claims Hubbard wrote in January 1949 that he was working on a "book of psychology" about "the cause and cure of nervous tension", which he was going to call The Dark Sword, Excalibur or Science of the Mind.

Inspired by science-fiction of his friend Robert Heinlein, Hubbard announced plans to write a book which would claim to "make supermen". On March 8, 1949, Hubbard wrote to Robert A. Heinlein from Savannah, Georgia; In that letter, Hubbard connected his upcoming book to Heinlein's earlier work Coventry, in which a utopian government has the technology to psychologically "cure" criminals of violent personality traits, turning them into psionic supermen called "nul-A's". He wrote to Heinlein:

Hubbard announced to the public that there existed a superhuman condition which he called the state of "Clear". He claimed people in that state would have a perfectly functioning mind with an improved IQ and photographic memory. The "Clear" would be cured of physical ailments ranging from poor eyesight to the common cold, which Hubbard asserted were purely psychosomatic.

In a 1949 letter to Forrest Ackerman, Hubbard promises his upcoming work will give Ackerman the power to "rape women without their knowing it, communicate suicide messages to your enemies as they sleep, sell the Arroyo Seco Parkway to the mayor for cash, evolve the best way of protecting or destroying communism". Hubbard admits he has "not decided whether to destroy the Catholic church or merely start a new one." Hubbard discussed returning to the concepts of his 1938 unpublished manuscript Excalibur, writing: "Don’t know why I suddenly got the nerve to go into this again and let it loose. It’s probably either a great love or an enormous hatred of humanity.[...] I would now and then decide [to] use it and start right in to apply and I would lose my nerve. But lo! courage rose and the book is going out before it sinks again."

To promote his upcoming book, Hubbard enlisted his longtime-editor John W. Campbell, who had a long-standing fascination with fringe psychologies and psychic powers ("psionics"). Campbell invited Hubbard and Sara to move into a cottage at Bay Head, New Jersey, not far from his own home at Plainfield. Campbell, in turn, recruited an acquaintance, medical doctor Joseph Winter, to help promote the book. Campbell wrote Winter to extoll Hubbard, claiming that Hubbard had worked with nearly 1000 cases and cured every single one, healing "Institutionalized schizophrenics, apathies, manics, depressives, perverts, stuttering, neuroses—in all.. ulcers, arthritis, [and] asthma.""With cooperation from some institutions, some psychiatrists, [Hubbard] has worked on all types of cases. Institutionalized schizophrenics, apathies, manics, depressives, perverts, stuttering, neuroses—in all, nearly 1000 cases. But just a brief sampling of each type; he doesn't have proper statistics in the usual sense. But he has one statistic. He has cured every patient he worked with. He has cured ulcers, arthritis, asthma."

Journalist Charlie Nairn, who filmed an interview with Hubbard in 1968, claimed that in a prior off-camera meeting, Hubbard acknowledged that 'it started out purely as a way to make money' but 'he became fascinated by catching people, especially clever people' (Nairn's words). Nairn recalled: "I remember him specifically talking about two medical doctors, [who got involved in Dianetics] as if they should have known better. I remember a sense of triumph from him over this idea – as if he felt some of his victims were maybe brighter than he was – but that they were needy, gullible – that he understood the human animal and its ‘needs’ – exploitable needs – backwards."

The birth of Hubbard's second daughter Alexis Valerie, delivered by Winter on March 8, 1950, came in the middle of the preparations to launch Dianetics.

In an editorial, Campbell said: "Its power is almost unbelievable; it proves the mind not only can but does rule the body completely; following the sharply defined basic laws set forth, physical ills such as ulcers, asthma and arthritis can be cured, as can all other psychosomatic ills."

The basic content of Dianetics was a rehash of Psychoanalysis. Like Freud, Hubbard taught that the brain recorded memories (or "engrams") which were stored in the unconscious mind (which Hubbard restyled "the reactive mind"). Past memories could be triggered later in life, causing psychological, emotional, or even physical problems. By sharing their memories with a friendly listener (or "auditor"), a person could overcome their past pain and thus cure themselves. Through Dianetics, Hubbard claimed that most illnesses were psychosomatic and caused by engrams, including arthritis, dermatitis, allergies, asthma, coronary difficulties, eye trouble, bursitis, ulcers, sinusitis and migraine headaches. He further claimed that dianetic therapy could treat these illnesses, and also included cancer and diabetes as conditions that Dianetic research was focused on.

Initial success of Dianetics and subsequent collapse

Dianetics was launched in Astounding's May 1950 issue and on May 9, Hubbard's companion book Dianetics: The Modern Science of Mental Health was published by Hermitage House. Dianetics was an immediate commercial success and sparked what Martin Gardner calls "a nationwide cult of incredible proportions". Five hundred Dianetic auditing groups had been set up across the United States.Staff (August 21, 1950). "Dianetics book review; Best Seller". Newsweek

Dianetics was poorly received by the press and the scientific and medical professions. Scientific American said that Hubbard's book contained "more promises and less evidence per page than any publication since the invention of printing",Rabi, Isaac Isador. "Book Review". Scientific American, January 1951 while The New Republic called it a "bold and immodest mixture of complete nonsense and perfectly reasonable common sense, taken from long acknowledged findings and disguised and distorted by a crazy, newly invented terminology".Gumpert, Martin. (August 14, 1950) "Dianetics: book review by Martin Gumpert". The New Republic Some of Hubbard's fellow science fiction writers also criticized it; Isaac Asimov considered it "gibberish" while Jack Williamson called it "a lunatic revision of Freudian psychology".

In April 1950, a "Hubbard Dianetic Research Foundation" was established in Elizabeth, New Jersey, with Hubbard, Sara, Winter and Campbell on the board of directors. Hubbard abandoned freelance writing in order to promote Dianetics, writing several books about it in the next decade, delivering lectures, and founding Dianetics organizations.

Although Dianetics was not cheap, a great many people were nonetheless willing to pay; van Vogt later recalled "doing little but tear open envelopes and pull out $500 checks from people who wanted to take an auditor's course". Financial controls were lax. Hubbard himself took large sums with no explanation of what he was doing with it. On one occasion, van Vogt saw Hubbard taking a lump sum of $56,000 out of the Los Angeles Foundation's proceeds. One of Hubbard's employees, Helen O'Brien, commented that at the Elizabeth, N.J. branch of the Foundation, the books showed that "a month's income of $90,000 is listed, with only $20,000 accounted for".

Years later, Sara would argue that while Hubbard had initially aimed merely to create religion for profit, the success affected Hubbard: "We were surrounded by sycophants. He began to believe that he was a saviour and hero; that he really was this God figure." Dianetics lost public credibility on August 10, 1950, when a presentation by Hubbard before an audience of 6,000 at the Shrine Auditorium in Los Angeles failed disastrously. He introduced a Clear named Sonya Bianca and told the audience that as a result of undergoing Dianetic therapy she now possessed perfect recall. In fact, she "failed to remember a single formula in physics (the subject in which she was majoring) or the color of Hubbard's tie when his back was turned. At this point, a large part of the audience got up and left." Popular science writer Martin Gardner publicized the outcome of the catastrophic meeting in his writings.

By late 1950, the Elizabeth, N.J. Foundation was in financial crisis and the Los Angeles Foundation was more than $200,000 in debt. Winter and Art Ceppos, the publisher of Hubbard's book, resigned under acrimonious circumstances. Campbell also resigned, criticizing Hubbard for being impossible to work with and blaming him for the disorganization and financial ruin of the Foundations. In December 1950, the American Psychological Association publicly criticized Hubbard's claims as "not supported by empirical evidence".Maisel, Albert (December 5, 1950). "Dianetics — Science or Hoax?" Look magazine, p. 79In view of the sweeping generalizations and claims regarding psychology and psychotherapy made by L. Ron Hubbard in his recent book, Dianetics, the American Psychological Association adopts the following resolution: While suspending judgement concerning the eventual validity of the claims made by the author of Dianetics, the American Psychological Association calls attention to the fact that these claims are not supported by empirical evidence of the sort required for the establishment of scientific generalizations. In the public interest, the Association, in the absence of such evidence, recommends to its members that the use of the techniques peculiar to Dianetics be limited to scientific investigations designed to test the validity of its claims." In 1951, Winter publicly wrote that he had never seen a single convincing Clear."I have seen some individuals who are supposed to have been 'clear' but their behavior does not conform to the definition of the state. Moreover, an individual supposed to have been 'clear' has undergone a relapse into conduct which suggests an incipient psychosis."

In late 1950, Hubbard had begun an affair with his 20-year-old public relations assistant Barbara Klowden, prompting Sara to start a relationship with Dianetics auditor Miles Hollister. On December 20, Hubbard paid a $50 fine for leaving his 8-month-old daughter Alexis locked in a car.The San Bernardino County Sun (San Bernardino, California) 21 Dec 1950, Thu Page 6 On February 9, 1951, the bodies of David Cary and his wife Helen were found after about two weeks. Both had recently been involved in the Dianetics Institute in Los Angeles, David serving as an instructor there. Police concluded Helen shot her husband and then turned the gun on herself.Los Angeles Evening Citizen News (Hollywood, California) 10 Feb 1951, Sat

Public claims of paranoid schizophrenia amid kidnapping scandal