The difficult and complicated doctrine of indulgences is peculiar to the Roman Church. It was unknown to the Greek and Latin fathers. It was developed by the mediaeval schoolmen, and sanctioned by the Council of Trent (Dec. 4, 1563), yet without a definition and with an express warning against abuses and evil gains. (Schaff, Philip; History of the Christian Church, Vol. VII, ch. 3, sec. 30)
When I began to research this topic, I was surprised—perhaps stunned is a better word— that the Roman Catholic Church has not denounced the whole idea long before now.
They have not! The Catholic Encyclopedia still defends the doctrine as accurate.
It may seem strange that the doctrine of indulgences should have proved such a stumbling-block, and excited so much prejudice and opposition. But the explanation of this may be found in the abuses which unhappily have been associated with what is in itself a salutary practice.
The practice, they say, is salutary. "Salutary" means "producing a beneficial effect". Thus, the doctrine, they say, is a good one. It is only the abuses that were a problem.
In spite of all this, disorders continued and furnished the pretext for attacks directed against the doctrine itself, no less than against the practice of indulgences. Here, as in so many other matters, the love of money was the chief root of the evil: indulgences were employed by mercenary ecclesiastics as a means of pecuniary gain.
Here the Catholic Encyclopedia tells us that the only problem with indulgences is that certain clergymen used it for "pecuniary" or monetary gain. Except for these rogue clergymen, the belief that the leftover good works of the saints can be applied to others is regarded as "salutary."
So exactly how does the Roman Catholic Church describe indulgences?
The doctrine of indulgences is Roman Catholic dogma only. The Orthodox Churches (the ancient Catholic Churches of the East) reject the teaching. One web site, at http://www.stjohndc.org/Russian/orthhtrdxE/e_P09.htm (accessed 11/26/2013), says:
It goes without saying that this mediæval teaching on indulgences was completely unknown in the ancient, undivided Church and is unacceptable to us, since it contradicts the whole spirit of Orthodoxy.
There are two ideas involved in the idea of an indulgence:
Purgatory, at least, has some historical basis. I am unable to furnish any source from the pre-Nicene (before the Council of Nicea) Christians or from the Scriptures to explain the origin of indulgences.
The idea behind superabundant merits is that Christ and the saints did so many good works that they don't need them all. The merit they have obtained with God that is beyond their need can be transferred to others.
The Catholic Encyclopedia says:
Since the satisfaction of Christ is infinite, it constitutes an inexhaustible fund which is more than sufficient to cover the indebtedness contracted by sin, Besides, there are the satisfactory works of the Blessed Virgin Mary undiminished by any penalty due to sin, and the virtues, penances, and sufferings of the saints vastly exceeding any temporal punishment which these servants of God might have incurred. ("Indulgences")
Protestants greatly object to this idea as a form of works salvation (besides the issue of the sinlessness of Mary). Personally, I agree that works play a role in going to heaven, but this idea of transferring someone's good works to someone else has no basis that I can find in Scripture or early Christian history. Scripture talks about the righteousness of Christ being applied to those who repent and follow him, but because of faith, not because of charitable giving.
Further, if "the satisfaction of Christ infinite," and it "constitutes an inexhaustible fund," then what need do we have of the "virtues, penances, and sufferings" of the "saints"? Why are we trying to add to infinity?
In the early 16th century, indulgences were being used by the Roman Catholic Church to raise funds for the building of St. Peter's Basilica. Johann Tetzel, a German monk, was particularly adept at raising funds in this manner. To this day, the Roman Catholic Church condemns some of the promises Tetzel made (mostly concerning promising forgiveness without repentance), but they defend indulgences as an appropriate reward for charitable giving, including giving to "the building of churches."
If Tetzel was guilty of unwarranted theological views, if his advocacy of indulgences was culpably imprudent, his moral character ... has been vindicated to the extent of leaving it untainted by any grave moral dereliction. ("Johann Tetzel": Catholic Encyclopedia)
Again, it is easy to see how abuses crept in. Among the good works which might be encouraged by being made the condition of an indulgence, alms giving would naturally hold a conspicuous place, while men would be induced by the same means to contribute to some pious cause such as the building of churches, the endowment of hospitals, or the organization of a crusade. It is well to observe that in these purposes there is nothing essentially evil. To give money to God or to the poor is a praiseworthy act, and, when it is done from right motives, it will surely not go unrewarded.("Indulgences"; Catholic Encyclopedia)
Martin Luther did not agree. If the Roman Catholic Church could really remove the suffering from purgatory, he said, then they ought to do it immediately and empty purgatory for free (Thesis 82). Selling forgiveness for money seemed awful to him.
Speaking of history, where did this doctrine come from?
Finding the history of this practice is very difficult. As the Catholic Encyclopedia points out, the word originally meant a kindness or favor.
Thus, during the Middle Ages, when pilgrimages were common and looked upon with favor, various Church authorities can be quoted as saying that indulgences were given in return for pilgrimages. In other words, the Church told people that if they went on a pilgrimage their sins would be forgiven.
However, just because a Church authority said that sins could be forgiven in exchange for a pilgrimage doesn't mean that they believed in the doctrine of superabundant merits of the saints.
So what we're tracking is the change in the meaning of the word indulgence, and that's much harder to track than just finding out when the word began to be used.
I believe it should suffice to say that during the Middle Ages the Church, at least in Europe, had reached such a level of superstition that all sorts of religious activities—like pilgrimages and obtaining relics—were seen as having the power to forgive sins.