Thirty years ago, on 23rd of August 1994, one million pounds was deliberately burned and destroyed in an old disused boathouse on the Scottish Isle of Jura. The answer to who would do this is the K Foundation, founded by The KLF band members: Bill Drummond and Jimmy Cauty. Why hold a bonfire?. At the time, the disillusioned duo retired from music and used the proceeds of their lucrative career to make anarchistic artistic statements about the role of money.
Preceding the one million pounds’ destruction was the K Foundation’s work “Nailed to a Wall”. This involved Drummond and Cauty nailing one million pounds in £50 notes to a framed board.1 They set a reserve price of £500,000, half the work’s face value to provoke debate and speculation about whether the artistic value could supersede the intrinsic monetary value.
Eventually, rather than using it for further art works, personal gain or even charitable purposes, they decided to incinerate the cash. This burning - whether you view it as wasteful, symbolic, or ritualistic - was intended to challenge us to consider money’s influence in our lives. Except for the charred remains and untouched notes which escaped the furnace by being blown up the boathouse’s chimney and strewn across island of Jura, by incinerating this fortune, Drummond and Cauty purposely erased all its value. The act was certainly controversial, but it succeeded in highlighting the nature of money - a value suspended upon collective belief and trust in the financial system, and yet is subject to the hidden effect of inflation which diminishes its value over time.
If £1 million had been left untouched since 1994, its real value might only be around half as much now due to the corrosive effects of inflation. Inflation is the persistent increase in the general price level of goods and services in an economy and erodes the purchasing power of our money over time. This is because as prices rise, the value of money decreases and each unit of currency affords fewer goods and services than it did before.
If we assume over the thirty-year period that inflation averaged 2% per annum - the target figure of the Bank of England to keep price rises low and stable - approximately £1,811,362 would be sufficient for £1 million to have the same purchasing power.2
Crucially however, for £1 million to have kept pace with the real rate of inflation, it would need to have grown more than 2% a year because the actual inflation rate averaged 2.5% per year from 1994 to 2023.3 This 0.5% annual difference between the 2% target and 2.5% real inflation may not sound a lot, but over the thirty-year period equates to a very sizable difference of £286,206. By taking this 2.5% figure as the annual increase needed to match inflation, £1 million would need to have grown to around £2,097,568.4
Exploring a different approach, if £1 million was invested in 1994 in a broad-based index like the UK’s FTSE All-Share, then today, with dividends re-invested, it might have grown to approximately £6.7 million.5
The question for trustees is whether they would have the ability to ride out the oscillations of market volatility over that period. This scenario also assumes a charity would have invested 100% in equities, which of course is not usually the case. Typically, charities with an investment portfolio would have a blend of different types of asset to manage risk and not put all their eggs in one basket. But this serves to highlight that while inflation continuously erodes the real value of money, there are ways of potentially mitigating this risk when it comes to investing.
Investing in assets, such as equities, offers one strategy of counteracting inflation risk and provides greater potential to effectively preserve and grow capital over the long term. After all, equities represent ownership in real companies where people create and add value through products, services, solutions, and experiences - ideally growing and compounding over time and increasing their prices to keep pace with inflation.
Past performance is not indicative of future results, and all equities do carry risks, including the potential loss of capital. To help demystify equities and explain the role they can play in a charity’s portfolio, watch the two minute video in our Charity Resource Hub to find out out more.
[1] http://klf.de/home/k-foundation-art-award/
[2] £1,000,000 x 1.02 ^ 30 = £1,811,361.58
[3] Bank of England inflation calculator: https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
[4] Bank of England inflation calculator: https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator
[5] Bloomberg – From 31st August 1994 to 27th August 2024, the totals return for the FTSE All-Share 572.06% (6.55% annually). £1,000,000 x 1.0655 ^ 30 = £6,708,163.23
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