The Danegeld was a tax created by English rulers to pay for the defense of their country from
Viking raiders. The rate of taxation was two
shillings for every 100-120 acres of land.
First levied in 868 under Alfred the Great, and thereafter as the need arose, the Danegeld was used to either buy off the raiders or to muster a militia to fight against them. If the English refused to buy them off, or the defense force was defeated, the Vikings would cut a large slit in the nostril of the local lord; from this, English gets the idiom "paying through the nose," meaning 'to pay an excessive price.'
In the early 11th century, the Danegeld was turned from an as-needed tax into a systematic source of royal revenue. In 1002, King Ethelred the Unready had angered the Vikings by ordering the slaughter of all Danes living in his territory. This enraged the Danish King, Sweyn Forkbeard, whose sister had been among those massacred. The Danish Vikings eventually extorted 40 million pennies from the English king, the most Danegeld paid out by any ruler. After a few years of these payments, Ethelred decided to raise an army to fight the Vikings. Ethelred began to collect the Danegeld regularly in order to pay for this army. The Vikings, under Forkbeard, completely destroyed Ethelred's army, killing the English king in the process. Forkbeard's son, Canute, would add England to his kingdom, including Denmark and Norway, after his co-regent, Edmund II Ironside, son of Ethelred, died. Under Canute, the Danegeld was renamed to Heregeld, and served to pay for the king's housecarls, or specialized foot soldiers.
The Danegeld was collected annually until the 12th century, when the Norman king William the Conqueror replaced the actual tax with tallage, a new tax levied on land rented by feudal lords to tennents. Danegeld was transformed into a royal fund, still used to pay off the Vikings, but drawing money from the state coffers instead of from the people directly. William ordered the creation of what we now know as the Domesday Book in order to account for how much money his government took in, and thus how much Danegeld would be available should the Norse ships appear on the horizon.
The Danegeld was last collected in 1162 by William the Conqueror.
Sources:
1 - http://www.encyclopedia.com/html/D/Danegeld.asp
2 - Webster 1913's writeup below
3 - http://www.encyclopedia.com/html/t1/tallage.asp
4 - http://viking.no/e/heritage/ee-money.htm
5 - http://www.taxworld.org/History/danegeld.htm
6 - http://www.domesdaybook.co.uk/story.html
7 - http://www.historybookshop.com/articles/glossary/danegeld.asp
8 - Ethelred the Unready by Segnbora-t
9 - http://www.xrefer.com/entry.jsp?xrefid=362417
10 - Housecarl by Segnbora-t
11 - Canute by, of course, Segnbora-t