First, we should understand the Roman Catholic understanding of Confession and Absolution. Unlike the Lutheran teaching in the Small Catechism which lists two parts: 1. Confession, where we confess our sins and 2. Absolution, where the penitent receives absolution, that is forgiveness from the pastor as from God himself, the RC doctrine has three parts: Contrition, Confession, and Satisfaction. Contrition is when a sinner feels sorry for his sins. The sinner then confesses his sins to a priest and receives absolution, that is forgiveness of sins from eternal punishment. The Lutheran usually stops there and goes in peace. The Roman Catholic isn't done yet. The third step is satisfaction. The penitent may have received remission of all eternal punishment, but there still remains temporal punishment. For this, the priest prescribes works of penance. This might include five Hail Mary's or Our Fathers for the five wounds of Christ, depending on the severity of the sin.
A problem arose when the penance required of penitents accumulated over years and the penance became too much to accomplish. The pope and bishops would prescribe indulgences as a way to relieve the burden of doing penance. Instead of reciting a number of Psalms on bended knee a penitent could fast for a day or pay alms. Often times indulgences involved making pilgrimages to holy places such as graves of saints, visiting relics, or the holy city Jerusalem.
Again, the bishop or pope doesn't arbitrarily (or so they claim) forgive the temporal debt of the penitent. The payment for the temporal punishment comes from the Treasury of Merits of Christ and the Saints. The RC Church teaches that just as the sins of a person negatively affect other people, the good deeds and merits of people benefit other people. So while the regular Bob and Sue might rack up a debt of temporal punishment, the super good Holy Virgin Mary and St. John racked up a surplus of merits. These along with all the merits and works of Christ and the Saints go in to a treasury in Heaven and the Pope and Bishops sort of like trustees, distribute them under the appropriate circumstances.
Indulgences became very important in RC practice. This is due strongly to its connection with the Treasury of Merits. The application of indulgences increased in use. Sinners who died in the "love of Christ" but who had not paid for all of their temporal punishment went to Purgatory to pay for their temporal punishment there. Indulgences eventually became available for those in Purgatory, using the logic that the Treasury of Merits is available to them and those on earth can access them on behalf of those in Purgatory. By the time of the Crusades in the 11th Century Pope Urban II introduced Plenary Indulgences. Plenary Indulgences forgave All temporal punishment for a penitent. Pope Urban II decreed, "Whoever out of pure devotion, and not for the purpose of gaining honor or money, shall go to Jerusalem to liberate the church of God, let that journey be counted in lieu of penance.”
Believe it or not Rome attempted to prevent the abuses of indulgences. In 1215 the Fourth Latern Council forbade bishops from giving indulgences of more than a year's worth of penance. The Third Lateran Council of 1179 limited bishops' rights to grant indulgences as well. Bishops were also forbidden to sell or show relics for money. However, the more strapped for cash the papacy became, the more Plenary Indulgences were issued by the Pope. In 1300 Pope Boniface VIII issued a Jubilee Indulgence to raise money. August 3, 1476 Pope Sixtus IV issued the first application of indulgences to souls in Purgatory with the Bull Salvator Noster.
The Jubilee Indulgence of Pope Julius II 1507 and Leo X 1513 sparked Martin Luther's 95 Theses. Archbishop Albert of Mainz issued the Instructio Summaria after Pope Leo X issued a commission of indulgences at the end of 1514 to the German and neighboring provinces. This indulgence was intended to help erase the debt of the Archbishop and help the building of St. Peter's in Rome, but that is not to what Luther objected. In fact Luther did not even know to what extent the corruption of these indulgences went.
Luther objected mostly to the people's understanding of the preaching, which accompanied the selling of indulgences. The hearers concluded that they could replace penitence with purchases of indulgences. Luther found this most offensive. Luther in a letter to the Archbishop asks, "How then can you, through false promises of Indulgences, which do not promote the salvation or sanctification of their souls, lead the people into carnal security, by declaring them free from the painful consequences of their wrong-doing with which the Church was wont to punish their sins?” Luther was concerned that the people would misconstrue the intention of indulgences and become lax Christians. Luther thought that a Christian should work out his salvation with fear and trembling (Phil. 2:12) with true repentance and reliance on Christ alone.
Luther believed that when Jesus said to repent, He meant the Christian should live a life of repentance (Thesis One). He also denied that the Pope could forgive any guilt, but he could declare and confirm the forgiveness of guilt from God (Thesis 6). The Pope also could only remit penalties that he himself imposed (Thesis 5), so the idea of a plenary indulgence was incompatible to Luther's thinking. Luther, however, did not yet call for the abolition of the papacy. He hoped that the pope would realize the error of these indulgences and correct them. We know that the story ended differently. Luther inadvertently threatened the purse of the papacy and bishops and was pushed to the center of controversy. Luther, however, did not back down, but instead he stood firm on the Word of God and eventually discovered and clearly articulated the true Gospel of Christ that man is justified by grace through faith alone propter Christum!
The RC Church has not done away with indulgences. Even in Vatican II Pope Paul VI insisted that indulgences were useful for the piety of Christians. The practice of introducing indulgences along with the doctrine of the Treasury of Merits are still errors of the Roman Church. As Luther states in his sixtieth thesis, "We do not speak rashly in saying that the keys of the Church are its treasure, and are bestowed by the merits of Christ." And again in his seventy-ninth thesis, "It is blasphemy to say that the cross erected with the insignia of the Papal arms is of equal value with the cross of Christ.” To stay true to the true doctrine taught by Luther, we must confess the authority given by the Church, The Office of the Keys and the Merit won by Christ and deny any additional authority.
In summary "An indulgence is the remission in the sight of God of temporal punishment due for sins, the guilt of which has already been forgiven. A member of Christ’s faithful who is properly disposed and who fulfils certain conditions, may gain an indulgence by the help of the Church which, as the minister of redemption, authoritatively dispenses and applies the treasury of merits of Christ and the Saints. (Canon 992) And an indulgence is partial or plenary according as it partially or wholly frees a person from the temporal punishment due for sins. (Canon 993)" This is not the purchasing of eternal salvation or forgiveness of the guilt of sins; nevertheless, this doctrine of the Roman Church distracts from the Gospel that Christ paid the full debt of sin. There is no Treasury of Merits except that, which Christ earned on the cross and gives freely in Holy Baptism, Holy Absolution, and the Lord's Supper.
Happy Reformation Day!