Since grace is just God deciding to be lenient, and picking people without considering merit, how did Christianity misunderstand grace to mean a resource needed to be sanctified, so that men could then be completed, perfected and finally saved?
To understand how, we must examine the methodology.
Simplified, the church taught that grace was a resource by which the souls was purified in order to be saved. And it was the depository of that grace, able to impart it through teaching, shepherding and administering of the sacraments. It was the misuse of these means that triggered off Luther's rejection not only of the means, but of the part grace played in salvation.
Grace in Christianity - Wikipedia
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Luther and Lutheran theology[edit]
Martin Luther's posting of his ninety-five theses to the church door in Wittenberg in 1517 was a direct consequence of the perfunctory sacramentalism and treasury doctrines of the mediæval church. The act was precipitated by the arrival of Johann Tetzel, authorized by the Vatican to sell indulgences.
The effectiveness of these indulgences was predicated on the doctrine of the treasury of grace proclaimed by Pope Clement VI. The theory was that merit earned by acts of piety could augment the believer's store of sanctifying grace. Gifts to the Church were acts of piety. The Church, moreover, had a treasury full of grace above and beyond what was needed to get its faithful into heaven. The Church was willing to part with some of its surplus in exchange for earthly gold. Martin Luther's anger against this practice, which seemed to him to involve the purchase of salvation, began a swing of the pendulum back towards the Pauline vision of grace, as opposed to James's.
Luther taught that men were helpless and without a plea before God's justice, and their acts of piety were utterly inadequate before his infinite holiness. Were God only just, and not merciful, everyone would go to hell, because everyone, even the best of us, deserves to go to hell. Our inability to achieve salvation by our own effort suggests that even our best intention is somehow tainted by our sinful nature. This doctrine is sometimes called total depravity, a term derived from Calvinism and its relatives.
It is by faith alone (sola fide) and by grace alone (sola gratia) that men are saved. Good works are something the believers should undertake out of gratitude towards their Savior; but they are not necessary for salvation and cannot earn anyone salvation; there is no room for the notion of "merit" in Luther's doctrine of redemption. (There may, however, be degrees of reward for the redeemed in heaven.) Only the unearned, unmerited grace of God can save anyone. No one can have a claim of entitlement to God's grace, and it is only by his generosity that salvation is even possible.
As opposed to the treasury of grace from which believers can make withdrawals, in Lutheranism salvation becomes a declaration of spiritual bankruptcy, in which penitents acknowledge the inadequacy of their own resources and trust only in God to save them. Accepting Augustine's concern for legal justification as the base metaphor for salvation, the believers are not so much made righteous in Lutheranism as they are considered covered by Christ's righteousness. Acknowledging that they have no power to make themselves righteous, the penalty for their sins is discharged because Jesus has already paid for it with his blood. His righteousness is credited to those who believe in and thus belong to him.