The basic gist is that Luther admitted his teaching ("his doctrine of justification by faith alone") made people worse. This is a typical charge, often argued by Rome's defenders that Luther was vexed and agonized that his teaching made things worse. If Luther's teachings really were from God, wouldn't they make people better? Wouldn't they make the world better? Even though I've covered this quote before, let's take a fresh look and see what Luther was saying about his evangelical teachings and their impact on the world.
Luther openly acknowledged the rapid decline in morals that his new religion was bringing about: "Luther quite candidly admitted the distressing state of things described above without in the least glossing it over, which indeed he could not well have done; in fact, his own statements give us an even clearer insight into the seamy side of life in his day. He speaks of the growing disorders with pain and vexation; the more so since he could not but see that they were being fomented by his doctrine of justification by faith alone. "This preaching,"; he says, "ought by rights to be accepted and listened to with great joy, and everyone ought to improve himself thereby and become more pious. But, unfortunately, the reverse is now the case and the longer it endures the worse the world becomes; this is [the work of] the devil himself, for now we see the people becoming more infamous, more avaricious, more unmerciful, more unchaste and in every way worse than they were under Popery."
While no documentation is provided, Rome's defender mentioned the old Roman Catholic biographer Hartmann Grisar a few times. A quick Google search reveals the quote came from Grisar's multi-volume biography of Luther. In volume 4:210, Grisar states,
Luther quite candidly admitted the distressing state of things described above without in the least glossing it over, which indeed he could not well have done; in fact, his own statements give us an even clearer insight into the seamy side of life in his day. He speaks of the growing disorders with pain and vexation; the more so since he could not but see that they were being fomented by his doctrine of justification by faith alone.
“This preaching,” he says, “ought by rights to be accepted and listened to with great joy, and everyone ought to improve himself thereby and become more pious. But, unfortunately, the reverse is now the case and the longer it endures the worse the world becomes; this is [the work of] the devil himself, for now we see the people becoming more infamous, more avaricious, more unmerciful, more unchaste and in every way worse than they were under Popery.”
 “Werke,” Erl. ed., 1², p. 14, “Hauspostille.”
Grisar's original text was in German. He provides a helpful reference: ""Werke,” Erl. ed., 1², p. 14, “Hauspostille.”" Here is Werke Erl. ed., 1², p. 14. The text reads,
“Hauspostille” refers to the House Postil. The House Postil sermons were delivered by Luther at his house (the old monastery) to his friends and family between 1531 - 1535. These sermons were not written by Luther, but were put together by two of Luther's associates (Veit Dietrich and Georg Roerer). In many cases, two versions of the sermons exist, as is the case with this text. The text Grisar is citing is Veit Dietrich's. His account can be found in English in Dr. Martin Luther's House-Postil, in the First Sunday in Advent sermon (Matthew 21:1-9). Roerer's version can be found in The Complete Sermons of Martin Luther Volume 5 (Michigan: Baker Books, 2000) pp. 25-30. Both accounts are very similar, except that Dietrich's is longer, containing additional material at the end. We'll be primarily utilizing the English translation in which the quote in question can be found here, but also referring to Roerer's version also.
Luther first explains how the Jews expected a grand powerful king, not a meek man riding on a donkey. They expected a man of might and power like all earthly rulers. A king who could provide earthly riches and power, thrusting the Jews to a powerful place over all the nations. Rather, this man on a donkey had a different power: the forgiveness of sin and everlasting life:
Luther goes on to say:
For we are all poor sinners, but in baptism, and afterwards in our whole life, if we turn unto Christ, He comforts us, and says: Give me your sins and take my righteousness and holiness; let your death be taken from you, and put on my life. This is, properly speaking, the Lord Jesus' government. For all His office and work is this, that He daily takes away our sin and death, and clothes us with His righteousness and life. [Dietrich''s version]Luther explains that a king with such extraordinary gifts should be most coveted, yet it is not:
"This announcement we should indeed hear with great joy, and every one should thereby be bettered and made more holy. But alas, the contrary is true, and the world grows worse as it grows older, becoming the very Satan himself, as we see that the people are now more dissolute, avaricious, unmerciful, impure and wicked than previously under the papacy." [Dietrich''s version]
"We must certainly receive this message eagerly and gratefully, by it becoming more pious and godly. Unfortunately there's the opposite side, that by this teaching the world becomes more and more hostile, wicked, and malicious; yet not through the fault of the teaching but of the people, thanks to the pernicious devil and death. Today people are possessed by seven devils, whereas before it was only one. The devil now bulldozes the people so that even under the bright light of the gospel they become greedier, slyer, more covetous, crueler, lewder, more insolent and ill-tempered than before under the papacy." [Roerer's version]Notice in Roerer's version, Luther doesn't blame his teaching, but the people and ultimately Satan.
Luther goes on to say:
What causes this? Nothing else than that the people disregard this preaching, do not use it aright for their own conversion and amendment, that is, for the comfort of their conscience, and thankfulness for the grace and benefit of God in Christ; but every one is more concerned for money and goods, or other worldly matters, than for this precious treasure which Christ brings us. For the most of us, when we do not feel our misery, the fear of sin and death, would rather, like the Jews, have such a king in Christ as would give us riches and ease here on earth, than that we should comfort ourselves in Him in the midst of poverty, crosses, wretchedness, fear and death. The world takes no delight in this, and because the gospel and Christ do not give it what it desires, it will have nothing to do with Christ and the gospel.[Dietrich's version]
"Why so? Not through fault of the teaching but because the message is not met with thankful acceptance; people cast it to the wind and pay more attention to money and goods than to the blessed treasure which our Lord Christ brings to us." [Roerer's version]In harmony with his earlier points, he explains people seek after earthly riches, not heavenly riches. Most people want the same powerful king the Jews expected, not the foolishness of Christ. With a pastoral heart, Luther warns:
Therefore our Lord in turn rebukes this world and says: Do you not rejoice in this, nor thank me, that through the sufferings and death of my only begotten Son, I take away your sins and death? Then I will give you sin and death enough, since you want it so; and where you were possessed of and tormented by only one devil, you shall now be tormented by seven that are worse. We see farmers, citizens and all orders, from the highest to the lowest, guilty of shameful avarice, inordinate life, impurity and other vices. Therefore let every one who would be a Christian be hereby warned as of God himself, joyfully and thankfully to hear and receive this announcement, and also pray to God to give him a strong faith, that he may hold fast this doctrine; then surely the fruit will follow, that he will daily become more humble, obedient, gentle, chaste and pious. For this doctrine is of a character to make godly, chaste, obedient, pious people. [Dietrich''s version]Luther states those who accept this gospel will have fruit follow and "will daily become more humble, obedient, gentle, chaste and pious. For this doctrine is of a character to make godly, chaste, obedient, pious people." Then there are those who will not accept the gospel:
But those who will not gladly receive it, become seven times worse than they were before they heard it, as we see everywhere. And the hour will surely come when God will punish this unthankfulness. Then it will appear what the world has merited by it. Now, since the Jews would not obey the prophet, it is told to us that our King comes meek and lowly, in order that we may learn wisdom from their sad experience, and not be offended by His poverty, nor look for worldly pomp and riches, like the Jews; but learn that in Christ we have a King who is the Just One and Savior, and willing to help us from sin and eternal death. This announcement, I say, we should receive with joy, and with hearty thanks to God, else we must take the devil, with walling, weeping and gnashing of teeth." [Dietrich''s version]
Was the world getting worse because of Luther's "new religion"? Yes! In context, it's the world which grows worse because of the gospel being preached. Those though who accept the gospel are transformed by the gospel. Luther consistently held that the gospel would find great opposition, and would be attacked from all sides. The gospel would be used by the world as a license to sin and all sorts of evil because of Satan. The gospel would indeed make those of the world worse, while changing the lives of those who accept it. Luther wasn't postmillennial. While he was discouraged that the world seemed to be getting worse, his eschatological expectation can be traced back even to the early days of his Reformation work. For Luther, it was the end of the world. Things were indeed going to get worse. The Gospel was going to be fought against by the Devil with all his might. The true church was a tiny flock in a battle against the world, the flesh, and the Devil. He hoped the people would improve with the preaching of the Gospel, he often admitted he knew things were going to get worse because of the Gospel.
These two links are of vital importance for anyone attempting to understand how Luther's House Postil was put together:
Unravelling Luther’s House Postils, Part 1
Unravelling Luther’s House Postils, Part 2
Of interest is the author's conclusion that "Veit Dietrich was correct; he was the only one who transcribed the sermons Luther preached in his home in the early 1530s, though Rörer may have been in attendance to hear portions of some of them."