It was towards the end of August 1994 that burnt, tattered and waterlogged scraps of £50 notes began to wash up on the shores of Jura, the mountainous, sparsely populated island in the Inner Hebrides. A few locals tried to piece together bits with visible serial numbers in order to claim replacement legal tender; others told the police and the papers. What drug deal or criminal payoff could have possibly gone so wrong that the perpetrators would need to burn all the money? And why Jura?

In the event, the trail led not to the Scottish underworld, but south, and to a stranger source. These were the ashes of the most improbable, audacious and ruinously expensive art statement in the history of pop, an anti-publicity stunt carried out in a remote location under conditions of ritual and total secrecy: the time the KLF burned a million quid.

Mick Houghton, the dance duo’s longtime publicist, fielded increasingly angry calls from members of the public who wanted to know why this money couldn’t have gone to kidney machines, children’s hospitals or their mortgages.

“It could have been worse,” Houghton recalls. “Jimmy and Bill had talked about torching the money in Trafalgar Square, or hiring Battersea power station for some huge event and then burning it in front of the crowd. Can you imagine?”

Conceived as a symbolic exorcism of what the KLF had become, Jura irrevocably froze Bill Drummond and Jimmy Cauty in the public mind as the “money-burning pop pranksters”. But they had always been a more complex and subversive proposition than that.

Drummond and Cauty stole from the Beatles and Abba, then sneaked illegal-rave culture on to Top of the Pops. They memorably hijacked the 1992 Brit awards as a symbolic massacre-suicide for the entire music industry. In using and abusing graffiti and money as contestable art objects, they anticipated the work of Damien Hirst and Banksy. The raw material of Robert Shea and Robert Anton Wilson’s esoteric Illuminatus! trilogy fed into their alter egos, the Justified Ancients of Mu Mu.

Now as we reach the symbolic 23rd anniversary of the cash-sacrifice on Jura – 23 being a totemic figure in Illuminatus! numerology and thus in JAMMs lore – the KLF are back. Gnomic flyposters promise a KLF book and an event in August “unearthing aspects of the 2023 trilogy across Liverpool”, where Drummond’s career began. The Illuminati, once a private fixation for Drummond, Cauty and the 1970s counterculture, have become a pop-culture obsession (see Beyoncé and her pyramid hand gestures). The KLF, AKA The Justified Ancients Of Mu Mu, were always agents of chaos. Now the world they anticipated is here.

Lasers, strobes and house beats might have defined the KLF but they are perhaps better understood as a 70s arts lab time-warped forward to the late 80s. Bill Drummond’s formative years were spent as a carpenter and set-builder; the avant garde actor and director Ken Campbell recruited him for his alternative Science Fiction Theatre of Liverpool in 1976, hiring him to design and build staging for a hugely ambitious, 12-hour-long adaptation of Illuminatus! As it happens, Drummond was 23 at the time.

The abandoned boathouse where the KLF burned the cash. Photograph: Murdo Macleod/The Guardian

“Don’t bother doing anything unless it’s heroic,” was Campbell’s advice, and Drummond carried that with him as he moved on to manage Echo and the Bunnymen. The previously introspective Scouse band gained mystique and press acclaim as Drummond had them play tiny dates on the Scottish islands (on a route that mapped out their own logo’s rabbit ears), travel along ley lines and stage their own ambitious Crystal Day festival in Liverpool. “This was typical Drummond thinking,” says Houghton. “It’s the Ken Campbell idea that any idea is achievable: you just go and do it.”

A brief stint as an A&R man at Warner followed, where Drummond’s only real success was goth-pop duo Strawberry Switchblade. “He had a romantic idea of what an A&R man should be,” says Houghton. “Bill had this tiny office with a piano and guitars in it, and he thought people could come in off the street and play him a song. That’s how you discover talent, he thought. It didn’t work of course.”

One ignominious signing was a dance-pop act called Brilliant. Their Stock, Aitken and Waterman-produced album cost a reported £300,000 to make, only for it to limp to number 58 in the charts. But it did introduce Drummond to Cauty, Brilliant’s keyboard player. Cauty had already made one improbable fortune as a teenager when he drew a poster of The Hobbit which sold in its thousands from Athena.

The two realised they were of a similar worldview. When Brilliant foundered – and after Drummond recorded an odd folk album called The Man – they determined to do something that flew in the face of everything that expensively produced major-label music represented. The washed-up 33-year-old former manager and the failed pop star would make a hip-hop record, purely from samples, recording it on New Year’s Day 1987.

The DJ, and future KLF collaborator, Tony Thorpe remembers hearing All You Need Is Love by the Justified Ancients of Mu Mu on John Peel one night in January 1987 and being outraged. “I was into sampling, too, but you were supposed to find obscurities; things that people didn’t know: James Brown, Roy Ayers, Funky Drummer, all that,” he recalls. “I turn on the radio, and I’m like, Oh my God, some idiot has sampled the Beatles. And it’s all out of time. I was amazed that anybody could be so blatant.” The British weekly music press, the “inkies” – then at the height of their powers – fell on the band as providers of good copy, and The JAMMs were on their way.

A series of stunts followed – including spraying posters of Manchester police’s homophobic chief constable James Anderton with the JAMMs slogan “SHAG SHAG SHAG” and travelling to Sweden in an attempt to hand over copies of their album to Abba (whose management had forced them to withdraw the record from sale because it used samples from Dancing Queen). Thwarted in that, they handed over a gold disc to a sex worker before burning the last of the stock in a field. It would all culminate in the biggest scam to date when, in June 1988, the JAMMs secured a No 1 single as the Timelords. Doctorin’ the Tardis was a magnificently crass novelty record that somehow managed to be nauseating and wonderful at the same time. “Doctorin’ the Tardis started out as a laugh,” says writer-producer Nick Coler, who had played keyboards for Drummond off and on since The Man and would later become part of the Xenomania songwriting factory.

Muffling the drums with tea towels and pairing octave guitars with saxophones for glam verisimilitude, they created a grotesque yet lovable masterpiece.

“They just wanted to do something dancey with the Doctor Who theme,” says Coler. “My friend Dominic Glynn had just redone the TV theme for the BBC, so he had all the original samples. When the BBC asked us where we got the Tardis noise, we said, oh, yes, we scraped a house key down a piano string, just like the original …”

Needing a frontman for a record supposedly “sung” by a car called Ford Timelord, they recruited the yet-to-be-disgraced Gary Glitter. “It was gloriously over the top, and we had this terrible, cheap, tacky video with a homemade Dalek,” remembers Houghton. “This was when they realised they didn’t have to front anything or behave like a pop band. They could go the whole hog and do what they wanted.”

A bizarre Top of the Pops appearance followed, with Drummond and Cauty in top hats and capes, wielding sceptres.

The Doctorin’ the Tardis record cover.

Doctorin’ the Tardis also introduced another facet of the KLF saga: the boom-and-bust cycle of making a fortune – often accidentally – and then contriving to lose it all. Cauty and Drummond spent the single’s estimated £500,000 earnings on filming The White Room, a free-form road movie directed by Bill Butt, which featured Ford Timelord driving aimlessly around rural England and Spain. It has never been released. A “proper” KLF single, a Pet Shop Boys-style track called Kylie Said to Jason, was intended to replenish the coffers but flopped. “They had a complete rethink after Kylie …,” says Mark “Spike” Stent, who worked with Drummond and Cauty on the mix of Doctorin’ the Tardis and would go on to become one of the world’s most in-demand engineers. “That turned out to be exactly the right thing to do. The rave scene was starting to kick off. People were running to phone boxes to find out where the party was. It was a huge, huge change in music and the KLF were made for it.”

Giving up on pop hits, Drummond and Cauty began to issue abstract electronic 12-inch records under the Pure Trance banner. The first, using an imperious electronic riff that Cauty created at home and which proved so difficult to reproduce that to make future versions they had to sample their own record, was entitled What Time Is Love?

It’s hard to imagine a less auspicious birthplace for such a tangent in pop than Cauty’s south-London squat, which the KLF had romantically christened Trancentral. “It was in a bombed-out Victorian mansion with a police car in the front garden,” says Stent. “I walked up railway sleepers to get into the front door, and when I went upstairs for a pee, I could see right through the floor into the kitchen. It wasn’t anything like a studio but they were brilliant to work with, total anti-pop stars. Their energy was always good. It was: we can do what the fuck we want. And in all the madness there was a genius pop sensibility going on.”

The Pure Trance recordings began to evolve into louder, larger, more confident versions that The KLF would later call “stadium house”. Stent recalls Drummond as providing “big concepts and insane ideas” while Cauty was “literally a musical genius. He had a brilliant electronica-sensibility plus a riff thing. The records we started to make were essentially rock records with synths doing what guitars would have done.”

With Tony Thorpe joining to provide breakbeats from house music’s never-ending torrent of new 12-inch releases and a rotating cast of vocalists and rappers, KLF tunes began to mutate. All those trademark shouts of “Mu Mu!” and “Justified!” and “Ah-ha!” from past JAMMs and KLF records became a private sample library to be raided and rebuilt into giant beasts fit for radio – making the new sound familiar. Cauty began to create sonic signatures such as the metallic dingadingadingadinga on Last Train To Trancentral and Justified and Ancient which came from hitting a dismantled Triumph Bonneville motorbike with an iron bar. The guitar riff on Justified and Ancient, on the other hand, came straight (but heavily disguised) from Jimi Hendrix.

Stent remembers the nightmare of getting state-of-the-art digital technology to work with Cauty’s primitive kit that was “falling apart, old Akais with fag ash and crap all over them … but they had a vibe”. Chains of machines would trail out of the studio door while Drummond and Cauty sat on the floor like schoolboys working out a video in one of Cauty’s sketchbooks. “You would hear them say: ‘Let’s get a submarine!’” says Stent, “but the thing was, they would actually make it happen.”

“It was like a music factory,” says Thorpe. “They’d have three studios going at once and they would let you get on and do whatever you wanted. You’d hear Mark’s mixes on the radio and, bam, they would just leap out. That was probably the best couple of years of my life, certainly the most fun. Those guys treated me better than anyone in music has ever treated me.”

By the end of 1991, the so-called Stadium House trilogy had made the KLF into the world’s biggest-selling singles act. But the weight of success had begun to take a toll on Drummond and Cauty. “They had been able to do what they wanted for so long because they felt outside the music industry,” says Houghton. “Once they became that successful, the industry embraced them and started to consume them.” Nothing was to say more about the KLF’s relationship with the music business than their manner of leaving it.

Bill Drummond at the Brit awards. Photograph: Rex Features

By 1991, Glenn Hughes, the Staffordshire-born powerhouse vocalist who cofounded Trapeze and twice fronted Deep Purple, had reached a parodically low ebb for a rock singer. Addicted to alcohol and crack cocaine and ballooning in weight, he struggled to complete a solo album. “I lived alone in Laurel Canyon with the curtains closed,” he recalls, an echo of the late 70s when his Los Angeles housemate David Bowie descended into his own cocaine-induced permanent midnight as he made Station to Station. “By the end of 1991, I was isolated and very alone,” he says. “Typical cocaine psychosis.” Then the KLF called.

Cauty and Drummond (a Trapeze fan) had conceived of a final version of What Time Is Love?, a guitar-driven, full-metal racket with a shrieking rock vocal. “I felt I was destined to do it,” says Hughes. “They wanted a [Roger] Daltrey or [Robert] Plant kind of sound, so when that Motörhead riff came in, I started singing falsetto: the Glenn Turbo Voice.” Nick Coler remembers Hughes blowing out the microphone with his screaming. Spike Stent says: “With all the choirs and orchestras and craziness, we ran out of tape machines.”

The video, shot back to back with a re-recording of Justified And Ancient with country matriarch Tammy Wynette, (Tony Thorpe: “I don’t think she had a clue what she was singing about. None of us did.”) was believed to have cost £500,000. The KLF flooded the James Bond stage at Pinewood with water and brought in a custom-made Viking longship and submarine. “It was take after take – a very draining video, and it was bloody freezing,” says Hughes. “I wasn’t drunk or high that particular day, but I was in a bad way at that time. And there’s that voice in your head saying: maybe you’ve got to make a change.”

Hughes went home to Los Angeles and, on Christmas Day, suffered a heart attack. On leaving hospital, he checked into the Betty Ford clinic; when he left rehab in February he discovered he was in the UK top 20. “I’d love to say that Bill and Jimmy got me off drugs,” he says, “but the truth is I did it to save my own life. While I was in Betty Ford, I kept thinking about this incredible opportunity and how maybe I could represent something again. It was a complete honour for me and a great time in my life.”

This final KLF single coincided with darker times for the group, especially for Drummond. They began recording nihilistic thrash-metal material with Ipswich grindcore band Extreme Noise Terror, for a record that was provisionally entitled The Black Room. “I got this message saying, “Bill from the ALF called,’” says Dean Jones of the band. “I thought, ‘Oh fucking hell, another benefit for hunt sabs.’”

In a climactic act of public self-destruction, Drummond and Cauty decided to perform a KLF/ENT speed-metal version of 3am Eternal (one that Christmas Top of the Pops had turned down) at the 1992 Brit awards. The performance was brutal enough, with a kilted Drummond stalking the stage, supported by a crutch, barking the lyrics over ENT’s barrage of noise, and finally machine-gunning the audience with blanks. (“They cut our guitars right down,” says Jones, “but at least we made Noel Edmonds cry”.) In the aftermath, they dumped a dead sheep on the red carpet at the Royal Lancaster Gate hotel adorned with the message, “I died for you – bon appetit”.

But what they originally planned was even worse.

The KLF sheep. Photograph: Rex features

Vegetarians all, Extreme Noise Terror refused to slice up the sheep on stage. Plan B was that Drummond, Cauty and the band would throw a fermentation bin full of pig’s blood over the front row of dignitaries. “Jonathan King sat us down,” says Jones, “and said that we could get time if we did this.” The machine gun replaced Drummond’s final idea: that, at the climax of the song, he would chop off his hand with an axe and throw it into the audience. “I really believed he was going to do it,” says Houghton, who pretty much scuppered the stunt by leaking the story to the Sun. “They were behaving as if they would have done absolutely anything at that stage. Bill was basically experiencing a nervous breakdown around that time, I think. They couldn’t face becoming a self-parody. They felt they had to make a statement.”

Even the watered-down, blood-free version was – as intended – impossible to walk back from. The final words heard after the KLF’s Brits performance were those of their radio plugger, Scott Piering: “The KLF have left the music business.” In subsequent months, the band deleted all their back catalogue in Britain, cutting off millions of pounds in future revenue. It was to be as if the KLF had never existed. But there was a further twist in the tale.

Having spent the KLF millions on longboats and submarines, burning through ever-more ridiculous sums on ever-more ridiculous projects in order to expel the poisoned money, Drummond and Cauty realised they had failed to take account of their worldwide royalties. Another million pounds was waiting for them. Some of it they awarded to the artist Rachel Whiteread in the K Foundation award for the Worst Artist of the Year in 1994. Some they tried to exhibit as Money: A Major Body of Cash.

Ultimately, in Jura, they would use it to build a fire.