The European Reformation
Before
Before the Reformation, most Christians in Europe were Roman Catholic, and had been since the 4th century. The Protestant Reformation broke the Western Christendom into two and then three and then four until finally there were uncountable denominations of Christianity, not just Lutherans, but Apostolic Lutherans, Reformed Lutherans, Free Lutherans, ect. This was hugely important, it changed peoples' way of looking at themselves and the world, and led to wider European literacy, and eventually forced governments to grant religious freedoms while maybe being more of a political revolution than a religious one.
During the European Middle Ages, the Catholic church dominated European civilisation. It was, firstly, the caretaker of the most important thing the Christians had - their souls, which were eternal. Then there was the parish priest, who played a central role in society, baptising, marrying, hearing confessions and providing last rites. The church also provided all of the social services. It ran charities, orphanages and education. Most Europeans would meet exactly one person who could read the Bible, only available in Latin: their parish priest. The church owned over 1/3 of all the land in Europe, which made it the most powerful economic and political force on the continent, and the Pope claimed authority over all the kings of Europe as the successor to the Roman emperor.
Origins of Division
For some time, the Church had been plagued by internal power struggles (in the late 1300s and 1400s, church was ruled by three Popes simultaneously). Popes and Cardinals often lived more like kings than spiritual leaders. Popes claimed temporal (political) as well as spiritual power. They commanded armies, made political alliances and enemies, and, sometimes, even waged war. Simony (the selling of Church offices) and nepotism (favouritism based on family relationships) were rampant. If the Pope was concentrating on these worldly issues, there wasn't as much time left for caring for the souls of the faithful. The Church’s corruption was well known, and several attempts had been made to reform the Church, but none of these efforts successfully challenged Church practice until Martin Luther's actions in the early 1500s.
Martin Luther
The Reformation was ultimately initiated and shaped by this one man. Martin Luther studied law and hated it. Then one-day lightning struck him to the ground, and in a panic, he cried, "Help me, Saint Anne, I'll become a monk!" He survived and immediately withdrew from University, entered an Augustinian monastery, took his vows, and sent a message to inform his family.
In 1505, Luther was sent to Rome on a diplomatic mission, where he discovered Rome's corruption, with prostitutes openly soliciting, priests who made light of their duties, hurrying through mass so fast that it seemed to mean nothing, and openly insulting church doctrine. Luther was obsessed with his own sinfulness, and he confessed endlessly.
Martin Luther was very devout and had experienced a spiritual crisis. He concluded that no matter how "good" he tried to be, he still found himself having sinful thoughts. He was fearful that no matter how many good works he did, he could never get to heaven (according to the Catholic Church, doing good works, for example commissioning works of art for the Church, helped one gain entrance to heaven).
His teacher sent him to the University of Wittenberg, because they were a little bit annoyed with him, and they figured he'd be good at teaching scripture. Luther finally found his answer in St. Paul's epistles, where he wrote, "The just shall live by faith." In other words, salvation comes through faith, as we can't ever be good enough through our actions to merit salvation (sola fide; Latin; by faith alone). Luther's interpretation of sola fide conflicted with the Catholic church when a monk named Johann Tetzel came to Wittenberg selling indulgences.
Indulgences
An indulgence was a donation to the church that came with a promise from the Pope to reduce a sinner's time in purgatory. If you committed no serious sins that guaranteed your place in hell, and you died before repenting and atoning for all of your sins, then your soul went to Purgatory - a kind of way-station where you finished atoning for your sins before being allowed to enter heaven.
Pope Leo X had granted indulgences to raise money for the rebuilding of St. Peter's Basilica in Rome. These indulgences were being sold by Johann Tetzel not far from Wittenberg, where Luther was Professor of Theology. To quote from an indulgence sold, "I replace thee in the state of innocence and purity in which thou wert at the hour of thy baptism." Luther felt like that wasn't the sort of thing that should be for sale. The price of the whole-life-complete-forgiveness-of-any-horrible-sins certificate was three marks, probably about half a year's wages for a labourer.
Luther didn't like seeing his parishioners handing over money that they didn't have for a scrap of paper that he believed to be meaningless, so in response, he wrote the “Disputation on the Power and Efficacy of Indulgences”, also known as the “95 Theses,” against indulgences and then nailed them to the church door for all to see on October 31st, 1517, or else he mailed them to the archbishop or possibly both, we don't actually know. The 95 Theses were written in a humble and academic tone, questioning rather than accusing. The first two of the theses contained Luther’s central idea, that God intended believers to seek repentance and that faith alone, and not deeds, would lead to salvation. The other 93 theses, a number of them directly criticising the practice of indulgences, supported these first two.
This led to a series of debates, during which Luther's positions became increasingly radical. Stating that Christians were saved only through faith and the grace of God, and then later saying that the church's rituals didn't have the power to save souls, arguing that the church and the Pope made errors all the time. It became more tense when Luther denied that the church and the officers of it had any spiritual powers. He said that the priesthood was a human invention and that individual Christians didn't even need priests to receive the grace of God, instead, Luther described a "Priesthood of all believers." This had gone from a call for reforming indulgences to a revolution.
Scripture Alone
When Luther and other reformers looked to the words of the Bible, they found that many of the practices and teachings of the Church didn't match Christ's teaching. This included many of the Sacraments, including Eucharist. According to the Catholic Church, the miracle of Communion is transubstantiation—when the priest administers the bread and wine, they change their substance into the body and blood of Christ. Luther denied this change during Eucharist. Luther thereby challenged one of the central sacraments of the Catholic Church, one of its central miracles, and thereby one of the ways that human beings can achieve grace with God, or salvation.
Council of Trent
The Church opened the Council of Trent to deal with the issues raised by Luther. The Council denied the Lutheran idea of justification by faith. They affirmed, in other words, their Doctrine of Merit, which allows human beings to redeem themselves through Good Works, and through the sacraments. They affirmed the existence of Purgatory and the usefulness of prayer and indulgences in shortening a person's stay in purgatory. They reaffirmed the belief in transubstantiation and the importance of all seven sacraments. They reaffirmed the authority of scripture and the teachings and traditions of the Church. They reaffirmed the necessity and correctness of religious art, but indicated that church officials should be careful to promote the correct use of images and guard against the possibility of idolatry.
Popularity
In 1521, Luther was called to defend his ideas before the Holy Roman Emperor, Charles V. Emperor Charles famously said a single friar who goes countered to all Christianity for a thousand years must be wrong. Plenty of friars had criticised the church's hypocrisies over the years, why would Luther prove influential? One reason was the printing press. Most people in Europe at the time couldn't read, but those that could, included priests. Over two thousand editions of Luther's writings appeared between 1517 and 1526, his ideas also appearing in pamphlets, posters and cartoons that were seen and read aloud, reaching millions of readers and listeners.
Perhaps the most revolutionary of Luther's publications was his translation of the Bible into German. For the first time, non-priests could read the Bible for themselves, and his work quickly caught on among common people. Hundreds of thousands of copies of Luther's Bible were printed. People carried it in their pockets and memorised it. Now, everyone could quote scripture and discuss its meaning.
Luther's theory was that if everyone just returned directly to the scriptures, they would see the one single truth, and the church would be restored to its original simplicity. Instead, Luther's protests started creating denominations: Zwinglians, Calvinists, Anabaptists, ect. And then the denominations had their own spin-offs. Each of these new Protestant churches thought that it new the true way to worship God, and that everyone else was going to Hell, and this led to some fighting.
People smashed up churches because the Bible says 'no graven images'. What started as a doctrinal dispute turned into a social revolt, and in 1525 German peasants took up Luther's ideas to give voice to long standing grievances against landlords and clergymen. The peasants rebelled, refused to pay taxes, pillaged church lands, and raised an army estimated at 300,000 people. Luther chose the elite, and said that Christian liberty was a spiritual concept, not meant to promote equality or freedom in the physical world. He then urged the faithful to smite, slay, stab rebels, and kill them. He also gave up his idea that congregations should elect its own ministers, and argued that Kings and Princes were put in place by God as caretakers of the church, and that turned out to be the winning side (for a few hundred years, anyway).
Friends in High Places
The German peasants revolt, resulted in the killing of an estimated 100,000 people. So Luther chose the princes in the name of stability and success, but why would princes choose Lutheranism, when the Holy Roman Emperor had forbidden it? Let's look at one example, Grand Master Albert of the Teutonic order of monks, started by reading Lutheran tracts and he became a fan, he allowed Lutheran preachers into his cities and even met with Luther in person.
Albert established the first Lutheran state church. At the time of his decision, the Grand Master had been losing territorial battles against the rest of Poland and running out of money. By breaking with the church, Albert was able to seize the church assets within his territory, which bolstered his military might, and then allowed him to settle his war favourably. And being a Duke, instead of a Grand Master Monk, he could get married, and produce heirs, which he did, founding the House of Hohenzollern, destined to unify and rule the German empire a few centuries later. This points to a huge incentive for princes and kings to break with the Pope. Money and power and pretty much the two favourite things of monarchs, and Protestantism allowed them to confiscate church land and other wealth, collect church taxes, and use church land for themselves. The Queen the largest land owner in England because of the Protestant Reformation.
Conclusion
Catholics truly believed that Protestants were heretics, and Protestants truly believed that the Pope and his hierarchy were imposters. If it were only about land and influence, how could we explain the case of Saxon elector John Frederick, for instance. When defeated and imprisoned by his Catholic emperor, Frederick was given the choice between his lands and his faith. He chose his faith. And then there were Catholics like Sir Thomas Moore, who would not sanction Henry VIII's break with the Pope, and chose execution over sacrilege. So, in the end, the reformation was both a religious movement and a political one.