Why did Luther reject every sacrament except Baptism and Communion?

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The answer depends on knowing the definition of a biblical sacrament as held by the Catholic church, and what led Luther to define a biblical sacrament differently.

Luther had been brought up to believe, and passionately did so believe in the capacity of Holy Rome to confer spiritual benefits; to have various means of grace. Here is an official definition of what Catholicism declares sacraments to be:

"The sacraments... are the seven vital actions of the Church in its liturgy which are efficacious for salvation. ...The theology of the sacraments, which began in Scripture, was constantly developed in the course of history." Encyclopedia of Theology, Ed. Karl Rahner, p.1477 (emphasis mine)

In 1520, Luther had a series of tracts printed, one of which dealt with the sacraments, as detailed in this book from which I now quote:

"...when Erasmus read the tract [The Babylonian Captivity], he ej***l*ted, 'The breach is irreparable.' The reason was that the pretentions of the Roman Catholic Church rest so completely upon the sacraments as the exclusive channels of grace and upon the prerogatives of the clergy, by whom the sacraments are exclusively administered. If sacramentalism is undercut, then sacerdotalism is bound to fall. Luther practically reduced the number of the sacraments from seven to two... The principle which dictated the reduction was that a sacrament must have been directly instituted by Christ and must be distinctively Christian." Here I Stand - Martin Luther by Roland Bainton, p137, emphasis mine)

By comparing those two definitions / principles for sacraments, it can easily be seen why Luther reduced them from seven to two. Take marriage, for example. Not every Christian must be (or have been) married at some point in order to be saved. Jesus himself was never married (though some would claim he was - the Bible certainly does not even hint at that.) Nor had Christ instituted marriage; that had been instituted by God right from the Garden of Eden. Nor has marriage ever been a distinctly Christian state. It is a union open to all men and women who choose it.

I won't go into the other sacraments as my answer is not to justify the reduction by Luther, just to show why it came about. I just mention marriage by way of an example that illustrates Luther's principle upon which he based whether an institution should be a sacrament or not.

Two other details worth pointing out: (1) Luther strove to get back to what Christ instituted (whereas Catholicism had, over the centuries, enlarged on the initially biblical basis for a few). (2) Luther objected to the sacerdotal nature of the priesthood in exclusively administering all Catholic sacraments as a means of grace that held power and fear over the populace (which contradicts the term, 'grace'). For those two reasons, in conjunction with his definition of a sacrament needing to have been instituted by Christ, and as being distinctively Christian, Luther no longer considered the other five matters to be sacraments.

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In his “Babylonian Captivity of the Church” Luther speaks of the anointing of oil as a visible type of prayer for healing. But it is not considered a sacrament.

In the Lutheran Confessions only three churchly activities are mentioned as sacraments (i.e. absolution/mutual consolation, baptism and the Lord’s Supper). By definition they are all are connected with the promise of forgiveness and so are considered necessary modalities for what are considered the full Gospel means of grace. Holy Orders, weddings, confirmation, etc. are just considered prayer rites.

In the Lutheran tradition prayer rites & public ceremonies are beneficial, but not necessary. For example, one can be married without a church rite by simply coming together as husband & wife (i.e. common law marriage).

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Why did Luther reject every sacrament, except Baptism and Communion ?

Baptism - Mathew 28:19
Confirmation - Acts 8:17; 19:6
Eucharist - Luke 22:14-20
Penance - James 5:16
Anointing of the Sick - James 5:14
Holy Orders - Acts 6:6
Matrimony - Genesis 2:24

How about:

Exorcism - Matthew 10:1, Mark 6:7, Luke 4:36
Monasticism - Matthew 19:12, 1 Corinthians 7:1

Why do Catholics themselves, who do practice them, nevertheless “reject“ them (as sacraments) ? Doesn't it seem somewhat odd, at first glance, to list unction, but to omit exorcism; or to include marriage, but to exclude monasticism ?

Since Luther himself was initially a pious Roman Catholic monastic priest, wouldn't it make sense to first acknowledge that Catholics themselves appear rather picky or selective, when it comes to their own reckoning of what biblical rites constitute a proper sacrament ?

And, once you've grasped that even Catholics themselves do not regard all divinely mandated, scripturally instituted, and traditionally accepted services or ordinations as such, try to deduce the mechanism by which Luther numbered his.

To complete Jess' answer:

  • Lutherans regard sacraments as a means of saving grace.
  • That salvation is by way of Christ's atoning sacrifice dates back to Saint Anselm, which the later Protestant Reformation (re)interpreted it in terms of penal or forensic substitution.
  • In the Lutheran view, salvation is by faith alone, through grace alone (traditional Protestant understanding of Ephesians 2:8).
  • As such, the (theo)logical implications of the above would be in determining what scriptural rites are closely correlated to the aforementioned view of salvation; these would then appear to be:
    • baptism into Christ's atoning death and resurrection (Romans 6). Traditionally, this goes hand in hand with confessing the creed (apostolic, Nicene, or Athanasian), which ties in rather nicely with Luther's stance on sola fide.
    • communion with Christ's atoning sacrifice, offered and poured for our salvation and justification (John 6, along with synoptic passages concerning the Last Supper).

Penance - James 5:16 - "Therefore, confess your sins to one another"

Penance is seen as a spiritual discipline, accompanying the two sacraments; see also Matthew 5:23-26, Luke 15:18-24.

Holy Orders - Acts 6:6 - "They presented these men to the apostles who prayed and laid hands on them."

See priesthood of all believers.

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