Nelson Bunker Hunt never set out to corner the silver market.

Billionaire Bunker and his billionaire brother W. Herbert just wanted to be sure that inflation and taxes wouldn't eat up the fortune they and their father, H. L. Hunt, worked so hard for.

They decided that turning their oil dollars into silver was the best way to beat inflation, shelter their income from tax collectors and protect the family billions. Silver was cheap compared to gold and could be moved about easily, the Hunts figured, so in 1974 the brothers began the biggest silver buying spree the world has ever known.

They bought so much that by last month the Hunts -- and the herd that followed them -- had led the nation dow n a silver path to the brink of financial panic.

Fear that the collapse of the silver bubble would set off a chain reaction was so great that Federal Reserve Board Chairman Paul A. Volcker set aside his own objections to banks lending to speculators and gave his approval for an $800 million line of credit to the Hunts so they could pay their silver debts without an emergency sale of their other investments.

"The potential was catastrophic," said James Stone, chairman of the Commodity Futures Trading Commission, the federal agency that monitors the situation. "It was a close call."

Just how close to financial disaster the nation came when the price of silver completed its two-month plunge from $50 to $10.80 on March 27 will be explored in three days of congressional hearings this week.

No one is likely to find out how much silver the Hunts bought or precisely how much they lost when Silver Thursday turned the richest brothers in America into the losers of the decade.

What is known is that when the Hunts ran out of money to pay their silver speculating debts, they put several brokerage houses on the ropes. Had they failed, the impact on their stock and bond investors is not calculable. Stone said the panic might well have spread to the banking system.

Like an image developing on a sheet of silver-coated photograpic paper, details of what happened have emerged gradually in the last month. It is a far different view than the instant picture popped out on the day the silver prices hit bottom:

The Hunts were not alone in bidding up the price of silver. They had a formal partnership with two Arab sheiks. Another group of investors worked anonymously through a Swiss bank to amass another massive stash of the metal. Not even federal investigators know who they are.

Some banks and brokerage houses played a key role in loaning the Hunts money, arranging exotic silver trades, even helping them shift some of their vast silver holdings out of the country.

Credit -- not oil billions -- financed much of the silver spree. Borrowing in ways the average investor would only dream of, the Hunts were able to buy into the silver market with little or no money down, and use profits they made when prices rose to buy more. When silver prices started to fall, the Hunts' debts multiplied just as fast as their borrowings had.

Some losses were planned in the Hunt's strategy. Using an investment technique called a silver straddle, the Hunts could simultaneously make and lose money in silver futures trading and in the process legally defer or reduce taxes on millions of dollars of income. The technique has been used by scores of other wealthy Americans although the Internal Revenue Service is trying to stop it.

The Hunts even played around with a scheme to sell silver-backed securities to investors, a move that if it had been successful would have been equivalent to printing their own money.

Although the Hunts commonly have been accused of trying to corner the silver market, federal regulators are convinced they were not. Bunker and Herbert had the chance last December, but they didn't take it. "The Hunts never, ever tried to embarrass a contract," said one major trader who knows their operations well.

No violations of the law have been alleged so far by federal investigators, although authorities say some brokerage houses made major errors in judgement by letting the Hunt accounts get too big. The brokers are being investigated by the Securities and Exchange Commission and the CFTC.

The Bache Group Inc., the Hunts' principal silver broker, was pushed to the brink of bankruptcy when the brothers were unable to pay their debts on time, but it was not alone. ACLI Commidity Services had the same problem but escaped public embarrassement because the private company that owned it was rich enough to buy its way out of trouble. ContiCommodities also escaped the public glare for awhile when its Arab customers ran short of cash because Continental Grain shoveled millions into its brokerage subsidiary.

The nation's commodities futures markets -- where speculators buy and sell contracts for delivery of commodities in the future -- are the last outpost for capitalism's cowboys. Futures traders buy contracts when they think the price will go up -- because the contrct will be worth more in the future -- and sell when they think the price is headed down.

Most players don't own any silver, nor do they want to. They just trade paper contracts and settle their profits and losses in cash. A silver contract is for 5,000 ounces of the metal. The Hunts routinely held 12,000 contracts, entitling them to buy 60 million ounces of the metal, nearly two thousand tons. At current prices of $14 an ounce that silver would be worth about $840 million. When silver was close to $50 an ounce, those contracts were worth $3 billion.

That was only their silver futures contracts. It didn't include the tons they purchased in the futures market and elsewhere and stashed in bullions and bars in vaults in Chicago, New York, Switzerland and perhaps elsewhere.

Nelson Bunker Hunt insisted all he has ever wanted to do is buy silver.

And buy he did. But as the Hunts kept buying and stashing the stuff, they drove the price up. The rise was gradual at first: from about $5 in early 1974 to $6 an ounce at the end of 1978.

It climbed faster and higher in 1979, but never as high as Bunker persistently predicted to one-fifth the price of gold. Even at the peak silver price, gold was more than 15 times the price of silver.

By September it had reached $11 an ounce and more and more people bagan to get the same idea as the Hunts. Sometime last fall the Hunts teamed up with their Arab allies who were able to add their oil-generated dollars to the Hunts. The Hunts took their profits from futures trading and used them to buy more silver. The Iranian and Afghanistan crises brought heavy buying in the Middle East.

Last fall, federal regulators were pressuring the futures exchange to cool off silver speculation.The Chicago Board of Trade acted first to reduce the number of contracts any speculator could have. CBOT and the Commodity Exchange Inc., (Comex) in New York both steadily raised the downpayment -- or margin -- that investors had to put up to own a contract.

But prices continued to rise. By January 1, silver was $37 an ounce -- six times its value the year before.

On January 17, the price closed at $48.70 after touching $50 during the day. By Jan. 21, both exchanges had taken drastic measures to halt the speculation. Downpayments to control contracts were raised dramatically, no one was permitted to add to his position and big holders were ordered to begin a steady dismantling of their holdings. The price plummeted to $5 an ounce, then began to sink more slowly.

The Hunts hung in, though. Even as the price began to fall, the brothers started negotiations with American investment bankers on a plan to use their vast silver store as security for a massive loan from the public: a silver-based bond sale. They could use the money from that sale to buy more of the metal.

Souces familiar with the negotiations said the scheme could have permitted the Hunts to permanently protect huge portions of their income because of techniques involved in using the Hunts' silver to back the securities. The deal would have put the Hunts as close as they could get to their dream of silver money.

But the negotiations in New York foundered. So, the Hunts, with four Arab allies, tried to put together a similar deal in Europe. But by this time the price of silver was well below its peak, down near $20. The calls to the Hunts from their brokers were to tell them of their losses, not their profits, and to ask them to add more money to keep their accounts whole.

The silver bond deal started off as a vote of confidence in silver on the part of the Hunts. But when the brothers finally announced a sketchy plan in Paris on March 26 (the deal has not yet come off and probably will not), the market interpreted it as a last ditch attempt by the Hunts to stay solvent. The market was right. The Hunts had temporarily run out of cash and Herbert flew to a meeting with Bache, Merrill Lynch and ACLI to tell them exactly that only hours after Bunker made his Paris announcement.

The price of silver declined $5 that Wednesday to about $15.

The next day was Silver Thursday. That is the day the Hunts' brokers began selling off every peice of Hunt collateral to come up with the cash the Hunts said they could not. It was the day Wall Street was pushed to the brink of panic.

To a far greater extent than was apparent when silver prices collapsed, the Hunts' silver bubble rested on a paper foundation.

It was not the Hunts' oil millions that got them into trouble in silver speculation, it was a credit empire built with the cooperation of some of the nation's biggest banks and brokerage houses.

The advantage of commodity futures to investors is that the silver or other things being purchased do not haveto be paid for all at once. The buyer just puts up a small cash downpayment, called a margin deposit. When the Hunts started buying silver futures the margin was less than 10 percent of the value of the silver.

But professional speculators don't even put the down payment in cash. Instead their margins are covered by a letter of credit from a bank. A letter of credit is not even a loan, it is simply a promise by the bank that funds are available if needed. Instead of the usual prime interest rate -- or higher -- paid on business loans, letters of credit cost only about one percent. The letter is backed by the borrower's assets.

With their down payments covered for only one percent, the Hunts had an even cheaper way to buy more silver futures once prices started to rise. It is called pyramiding. It is standard practice for futures traders and it works this way:

The futures markets settle each customer's account in cash every day. Profits are credited to the account, and losses are collected.

To build a pyramid, the speculator uses the profits earned on the initial contracts as downpayments on still more contracts. When the price of silver moves from (KEY OFF) to $6 an ounce, the customer immediately gets another $1 to invest.

Profits on the second batch of futures can then be reinvested to keep building the pyramid as prices go higher. When prices come down, however, the customer who has pyramided quickly gets into trouble covering daily losses.

The Hunts bought many silver futures for less than $10 ounce and watched the price rise to $50. If they had left the profits in their accounts, they would have had only paper losses when prices started to fall. But the Hunts were pyramiiding, and taking out their profits to buy other investments, so when the market turned down, they quickly started losing real money.

The Hunts also used a no-money-down method to buy silver. They signed what are called "forward contracts" to buy silver from many big metals dealers. Forward contracts are private transactions, unregulated by the government and usually require no down payment.

The biggest single loss reported so far by the Hunts was $400 million on a forward contract deal with Englehard Minerals. The Hunts signed a contract in Jaunary to buy 19 milion ounces of silver at $35 an ounce in April. By that time, silver had dropped $20 an ounce. Rather than pay twice what the metal was then worth, the Hunts settled by giving Englehard oil properties they owned in Canada's Beaufort Sea.

The Hunts also financed some silver purcahses by borrowing directly from metals brokers. One firm known to have acted as a banker for the Hunts was ACLI Commidity Services, a subsidiary of ACLI International, which is owned by A. C. Israel, chairman of the Board of People's Drug Stores of Washington.

A Bache metals subsidiary also arranged financing for Hunt deals, in effect borrowing money for the Hunts from major banks. Heeding pleas by the Federal Reserve Board not to make speculative loans, at lest one major bank turned down such a deal, but others did not.

What stopped the Hunts' silver spree, Bunker would claim, was a comibination of interest rates and conflicts of interest.

The Hunts were buying silver with borrowed money and soaring interest rates were forcing them out of the market, Bunker complained during a meeting last October with CFTC officials. "He said the high interest rates of 16 percent make him think twice before he will purchase additional silver," recalled John Mielke, one of the regulators who sat in on the session.

Bunker and Herbert complained repeatedly to the CFTC and to the two major silver exchanges about steps that were being taken to curtail speculation.

As far as the Hunts were concerned, the exchanges were changing the rules in the middle of the game -- and doing it for the advantage of members and officers.

CFTCchairman Stone acknowledges potential conflicts of interest are inevitable in the self-regulatory scheme. He insists the exchanges' actions ought to be judged on whether the results were in the public interest, not on whether some exchange members happened to benefit financially.

Stone salutes the Chicago Board of Trade for acting sooner than Comex to limit excessive speculation, but

The commodity agency is investigating possible conflicts by board members of both exchanges.

The self-governing power of the commodity exchanges would be usurped by the federal government under regulatory remedies being pushed by Stone, the Federal Reserve Board and the Securities and Exchange Commission. Last week, the exchanges invited key congressional committee aides to a series of catered luncheons in a Capital dining room to lobby against the moves.

The CFTC chairman contends the government ought to move to curtail excessive speculation on three fronts. The Federal Reserve Board should have the power to set down payments on futures contracts, just as it does in the stock market. Limits ought to be set on how many futures contracts any one speculator -- or group -- can buy. Commodity brokers ought to operate under a "suitability rule" requiring them to discourage naive investors from getting into high-risk commodity markets.

Stone has not been able to convince the other three members of his own commission that these remedies are needed, and is likely to have a tougher time with Congress.

The "turf fight" between the Cftc, the SEC and the Fed may be one reason why federal regulators did little of anything to keep the silver bubble from inflating to the bursting point. Congressional investigators say there was poor coordination between agencies, because each was pursuing only its own interests.(KEYWORD) CAPTION: Illustration, The jagged line of the Hunt brothers' rollercoaster represents the climb in silver prices to a high of $50 before the plunged to $10.80. By Dan Sherbo for The Washington Post