How an anonymous donation could pay off the UK's national debt
In 1919, Stanley Baldwin, then Financial Secretary to the Treasury and future Prime Minister, wrote a letter in the Times newspaper. In it, he called on the rich to make donations to help pay off the national debt accumulated during the first World War.
Baldwin himself donated a fifth of his family's wealth – a total of £120,000 – and a substantial sum at the time. Alas, few followed Baldwin's example except for one very generous individual who, in 1928, made an anonymous donation of £500,000 into a 'National fund'.
The catch
There was a catch though: the money could only be used if it could pay off the nation's entire national debt in one go. Until then, the money was to stay invested.
One can't help but wonder what the anonymous donor was thinking at the time: the donation was substantially less than the £7.52 billion* national debt at the time (indeed it was only 0.00665% of the total), and the donor must have known that there was no hope their contribution would pay off the debt any time soon.
But I like to think the donor new exactly what they were doing: that they understood the power of compound interest.
The power of compound interest
For the past 90 years, the money has been invested. The initial £500,000 donation has now grown to £475 million (950 times larger than the original investment) and has become one of the largest charities in Britain.
What annual rate of growth did the investments achieve to build this incredible sum? 50%? 30%? 15%?
Actually, the average annual growth rate was 7.916%**: an excellent return to be sure, but not unachievable for those with high risk tolerance and a long time horizon.
This is a cracking example of how you can build wealth over the long term, if you understand how compound interest works.
Paying off the national debt
This story made the headlines last year, when the UK government went to the high court in an attempt to gain access to the trust to pay off some - rather than all - of our national debt.
Because the bad news is that, since 1928, the national debt has grown substantially and now stands at around £1.78 trillion*.
But the good news is that the donation has grown at a faster rate and now represents 0.0266% of the national debt.
If this trend continues (and the money is not accessed beforehand) then eventually the donor's investment will match the national debt.
How quickly might this happen?
Not in my lifetime maybe, but assuming the growth rates for the debt and investment of the past 90 years continue at the same pace, the debt would be paid off in 2552 – some 624 years after the initial investment.
For those who are counting, at this stage the government debt is estimated to be two hundred and twenty septillion, four hundred and twenty-eight sextillion, four hundred and ninety-four quintillion, two hundred and thirty-seven quadrillion, six hundred and ninety trillion pounds!
Or £220,428,494,237,690,000,000,000,000.
We are still awaiting a decision from the high court, so we will have to wait to see what happens. But I suspect our anonymous donor is watching down on us from somewhere, with a quiet sense of satisfaction.
Baldwin's request may not have been in vain after all.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. James's views are his own and do not constitute financial advice.
*Source: https://www.ukpublicspending.co.uk/spending_chart_1900_2020UKb_XXc1li111tcn_G0t and https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/timeseries/hf6x
**Compounded annual growth rate, 1928 to 2019