Money burning or burning money is the purposeful act of destroying money. In the prototypical example, banknotes are destroyed by setting them on fire. Burning money decreases the wealth of the owner without directly enriching any particular party. It also reduces the money supply and (very slightly) slows down the inflation rate.
Money is usually burned to communicate a message, either for artistic effect, as a form of protest, or as a signal. In some games, a player can sometimes benefit from the ability to burn money (battle of the sexes). The burning of money is illegal in some jurisdictions.
Macroeconomic effect
For the purposes of macroeconomics, burning money is equivalent to removing the money from circulation, and locking it away forever; the salient feature is that no one may ever use the money again. Burning money shrinks the money supply, and is therefore a special case of contractionary monetary policy that can be implemented by anyone. In the usual case, the central bank withdraws money from circulation by selling government bonds or foreign currency. The difference with money burning is that the central bank does not have to exchange any assets of value for the money burnt. Money burning is thus equivalent to gifting the money back to the central bank (or other money issuing authority). If the economy is at full employment equilibrium, shrinking the money supply causes deflation (or decreases the rate of inflation), increasing the real value of the money left in circulation.
Assuming that the burned money is paper money with negligible intrinsic value, no real goods are destroyed, so the overall wealth of the world is unaffected. Instead, all surviving money slightly increases in value; everyone gains wealth in proportion to the amount of money they already hold. Economist Steven Landsburg proposes in The Armchair Economist that burning one's fortune (in paper money) is a form of philanthropy more egalitarian than deeding it to the United States Treasury. In 1920, Thomas Nixon Carver wrote that dumping money into the sea is better for society than spending it wastefully, as the latter wastes the labor that it hires.
Opposites
Central banks routinely collect and destroy worn-out coins and banknotes in exchange for new ones. This does not affect the money supply, and is done to maintain a healthy population of usable currency. The practice raises an interesting possibility. If an individual can steal the money before it is incinerated, the effect is the opposite of burning money; the thief is enriched at the expense of the rest of society. One such incident at the Bank of England inspired the 2001 TV movie Hot Money and the 2008 film Mad Money.
Another, more common near-opposite is the creation of counterfeit money. Undetected counterfeit decreases the value of existing money—one of the reasons why attempting to pass it is illegal in most jurisdictions and is aggressively investigated. Another way to analyze the cost of forgery is to consider the effects of a central bank's monetary policy. Taking the United States as an example, if the Federal Reserve decides that the monetary base should be a given amount, then every $100 bill forged is a bill the Fed cannot print and use to buy Treasury bonds. The interest earnings (after expenses) on those bonds is turned over to the US Treasury, so any lost interest must be made up by U.S. taxpayers, who therefore bear the cost of counterfeiting.
Rationales
Behaviorally speaking, burning money is usually seen as a purely negative act. The cognitive impact of burning money can even be a useful motivational tool: patients who suffer from nail biting may be trained to burn a dollar bill every time they engage in the habit. One study found this form of suppression training by self-punishment to be effective compared to control groups, although not as effective as substitution training.
On the other hand, there are some situations where burning money might not be so unreasonable. It is said that the ancient Greek philosopher Aristippus was once on a ship at sea when he was threatened by pirates; he took out his money, counted it, and dropped it into the sea, commenting, "Better for the money to perish because of Aristippus than vice versa." Cicero would later cite this episode as an example of a circumstance that must be considered in its full context: "...it is a useless act to throw money into the sea; but not with the design which Aristippus had when he did so."