Excellent piece on this found here, by the way.
By the time of the Middle Ages, Christian interpreters of the Bible had come to classify the interpretation of Scripture in terms of four "senses" that the biblical text could have. The default would be to take a biblical text literally, the "literal sense." We might say today that the literal sense of a text is when the words are taken in their normal way.
As a side note, the English use of the word "literally" has changed to where people often mean something like "really." Take the English idiom, "he went through the roof," which means to suddenly get really angry. Someone might say, "He literally went through the roof," when what they mean is that he really "went through the roof."
This is not what the word "literally" means when we talk about the literal sense of certain words. In fact, to literally go through the roof in this context would mean to take the words in their normal sense, meaning that a person's body passed through the physical structure of the roof above one's head. The literal sense of a text is thus the meaning it most naturally had at the time and place it was written, the meaning its author and audience would most likely have assigned the words at the time of writing.
Mind you, medieval interpreters were not well equipped to distinguish between what the normal sense of words would have been for the authors of the Bible and what seemed to be the normal sense of the words to them as readers. To approach the normal sense of words in the Bible in their original terms, we have to know how the people at the time of writing were using the words. Such meanings were functions of the socio-cultural worlds in which the authors and audiences of the biblical texts lived, and we do not always have clear access to such "deep structures" behind language.
Although the medieval interpreters came to speak of four possible senses to the words of Scripture, they really only boiled down to two categories--literal and non-literal. Either you read the words for what they normally mean or you read them in some other, non-literal way. So one of the four senses of Scripture is the literal, and the other three are all non-literal ways of reading Scripture.
The three non-literal or "spiritual" ways of reading Scripture are the 1) allegorical, 2) moral, and 3) anagogical. The allegorical sense sees a teaching or truth in the text by taking the words in something other than their normal sense. The moral sense sees ethical instruction about how to live by taking the words in something other than their normal sense. The anagogical or future sense sees teaching about what is still to come, including heaven or the afterlife, by taking the words in something other than their normal sense.
Lest we dismiss these sorts of readings out of hand too quickly, it is important to recognize that the New Testament authors interpreted the Old Testament in all these ways. Further, many Christian teachers today use these sorts of methods without realizing it, especially prophecy teachers. In Galatians 4:21-31, Paul makes an allegory out of the Genesis story of Hagar and Sarah. In 1 Corinthians 9:9-10, Paul interprets the Deuteronomy command not to muzzle the ox while treading the grain morally, concluding that the real meaning of the command has to do with materially supporting those who do ministry work. And Hebrews 4:8 arguably read Psalm 40 anagogically when it took the "rest of God" to refer to something future rather than the entrance of Israel into Canaan.
The Protestant Reformation seriously questioned the use of allegory in interpretation. Allegory is when the elements of a biblical text are made to correspond to truths that were not part of the original meaning. The classic example comes from Augustine's allegorical interpretation of the Parable of the Good Samaritan. The man who is mugged is Adam, who is mugged by the Devil and his angels. The priest and Levite are the Law, which cannot provide salvation. Christ is the Good Samaritan and the inn is the church. Obviously none of these meanings were originally part of Luke 10.
In the early 1500s, Martin Luther wished to get back to the teachings of the Bible and prune back the accretions of the Middle Ages. But if Scripture could be taken allegorically, there was nothing to stop the Roman Catholic Church from claiming that its later teachings were simply the appropriate spiritual interpretations of the Bible. It was thus somewhat inevitable that the drive back to "Scripture alone" (sola scriptura) would emphasize literal interpretation over "spiritual" interpretation.
But this trajectory introduced a two-fold problem for Protestant interpreters. First, there is the problem, as we have seen, that the New Testament texts themselves at times use allegorical methods. The second problem is that the first centuries of the church are arguably central for core Christian understanding, since it was in the 300s and 400s that our current beliefs about the Trinity and the divinity of Christ were really hammered out in detail. One might argue that "spiritual" interpretation played a role in the formation of these core Christian beliefs.
To address the first problem, Protestant interpreters developed a category called "typology," which they distinguished from allegory, even though this distinction was unknown to the ancients. Typology supposedly was when a New Testament author took an Old Testament passage in a non-literal way but in a way that built on some truth that was intrinsic to the Old Testament passage itself on its own terms. So when Hebrews warns its audience to continue in faith until Christ returns and contrasts the Israelites who did not enter God's rest in Canaan, the correspondence is very analogous.
The moral or tropological sense finds some ethical instruction by taking some passage in a figurative sense. When non-literal interpretation is divided in this way, allegory comes to apply more to finding teaching in a text and the moral sense has to do with finding ethics in a text that was not straightforwardly ethical in that way before. Paul's thus finds an ethic about supporting ministers in instruction that was literally about oxen.
One might suggest that the bulk of dispensational prophecy teaching about the future, from its rise in the 1800s under John Darby to its most recent manifestations with individuals like Tim LaHaye, is a variety of anagogical or futurist interpretation. Few of the texts such schools of prophecy use are actually read in context. So Mark 13, which so clearly relates to the destruction of the temple in AD70 is taken to prophesy a temple that is yet to be rebuilt.
The aversion of Protestantism to allegory led to an important distinction that we should keep in mind in any future discussions. Although there is still often resistance to the existence of allegory in the biblical texts, it is clear that not everything in the Bible is literal. A parable, for example, is meant to be interpreted symbolically at least to some extent. When Jesus says the kingdom of God "is like" something, he is using simile.
It is thus better to distinguish between the "plain sense" of the Bible and spiritual or a "fuller sense" (sensus plenior) to a text than to distinguish between literal and non-literal. The plain sense of a text is its original sense, whether it was originally meant to be taken literally or originally meant to be taken as a metaphor, allegory, etc. The question then becomes whether it is appropriate for us to allegorize the text in ways that were not originally intended.