The indulgence began as an act of mercy inside a system of ferocious discipline. Early medieval penance was tariffed, so many years of fasting for such a sin, and the tariffs could stack into impossible lifetimes; commutation followed, harsh terms exchanged for gentler ones, a pilgrimage, an endowment, a work of charity. The decisive step came in 1095, when Urban II promised the crusaders at Clermont that the journey itself would stand for all penance, the first plenary indulgence.
The theology was systematized afterward: Christ and the saints had earned merit beyond all need, a treasury the Church could dispense; an indulgence drew on it to remit not guilt, which only absolution touches, but the temporal punishment still owed after forgiveness. The machinery then did what machinery does. Indulgences were extended to the dead in purgatory in the fifteenth century; preaching campaigns were licensed to fund cathedrals, hospitals and wars; and the required almsgiving shaded, in practice and in the public mind, into purchase. The distinction between the doctrine and its traffic was real, and reformers inside the Church said so for two centuries before Luther. But by 1517 the practical experience of the ordinary Christian was of grace with a price list, and it was against that experience, not against forgiveness itself, that the Reformation's first document was aimed.