That is such a libel of Lovecraft. You make the unwarranted assumption that he didn't know better, just because his readers didn't.
Had he tried to educate them, rather than pander to their ignorance by conforming to the incorrect convention, it would have cost him enormously in terms of future sales.
OTOH, maybe he was ignorant of the real thorn, as opposed to the spurious Y.
Actually, I really think Lovecraft didn’t know. I do recall somewhere else in his body of work the ‘ye’ article showing up (not 100% sure). Has been a long time since I read it and am not sure, but Charles Dexter stood out because so much of the ancestor’s notes were in that form.
I haven’t read his letters and they possibly would shed light on this (or not).
Libel is one of the more serious accusations against me recently, particularly concerning someone dead 75 years. :/
As far as what his intentions were in this, who knows, but I, despite having studied anglo-saxon previously, didn’t figure out where this ‘ye’ article came from until I was older than lovecraft was at death. I remember thinking “ok so they used declensions of The and Se as articles in old english, we use ‘the’ in modern english, where is this ‘ye’ coming from? Not old norse...