IN 1913, a young German publisher named Kurt Wolff issued Franz Kafka's first book. There were a few good reviews, but generally the world yawned. Kafka later said that a fashionable Prague bookstore, Andre's, sold a grand total of 11 copies. Ten of them he knew about, having purchased them himself, but he kept wondering exactly who had bought the 11th.

Wolff lost money but he didn't lose faith, and went on to publish most of Kafka's work. In 1942, at the bleakest moment of World War II, he and his wife Helen started Pantheon Books in a Manhattan apartment, and for nearly half a century the publishing house has carried on his commitment to serious fiction and nonfiction. Late last month, however, a controversy erupted over the future of Pantheon, one that went to the heart of the issue Wolff was dealing with so long ago: How to make money while making good books.

Ironically, Pantheon (which in 1961 was bought by Random House) now holds the U.S. rights to all of Kafka's work. As an enduring classic still much read and taught, he's doing his bit to keep the firm afloat. It's the question of where the Kafkas of the future will be nurtured that has everyone so animated. This is the noisiest, most vicious publishing controversy since William Shawn was forced out as editor of the New Yorker three years ago.

Both the New Yorker and Pantheon have the same owner, and in each case the matter started there. S.I. Newhouse and his family have the largest concentration of wealth in private hands in America: perhaps $10 billion, spread out over newspapers, cable TV, the Parade newspaper supplement, such magazines as Vogue and Vanity Fair, and -- since 1980 -- Random House Inc.

This last, led by its Knopf division, is by itself the most prestigious and important book publishing conglomerate in America -- a fact its employees never tire of reminding you of. As a relatively small part of this empire, Pantheon has had a protected life, concentrating on foreign fiction and political and cultural material that challenged the status quo.

It never seems to have made any money, but then it never had to -- until S.I. Newhouse called the bills due last month. Amid rumors that the list would be cut by two-thirds from its present total of 110 books a year, longtime Pantheon head Andre Schiffrin resigned. Bound by a "golden handcuffs" clause in his buy-out contract, Schiffrin isn't permitted to talk. The majority of his senior editors -- six out of nine -- quit in protest and sympathy.

Some of the developments since then:

Publishers Weekly, a trade magazine not known for controversial stands, printed a rare editorial headlined "A Sad Day for Andre Schiffrin -- and for Publishing." In it, editor-in-chief John Baker wrote that "we hear one of the complaints directed by current Random management against Pantheon, apart from its too-large list and unprofitability, was that it published too many left-wing books, and why could these not be better balanced by some right-wing ones?"

A protest action was held in front of Random House March 5, drawing 350 members of the literary community -- the first time anyone could remember a publisher itself being the cause of a demonstration. Among the speakers: Studs Terkel, a bestselling and Pulitzer-winning Pantheon author, who announced the previous week he'd never be published by the house again. Petitions signed by Czeslaw Milosz, Nadine Gordimer, William Styron, Arthur Miller, Robert Stone and dozens of other prominent writers were announced. The new head of Random House, Alberto Vitale, was denounced in various forums as a hatchetman brought in to do Newhouse's dirty work.

At the National Book Critics Circle awards ceremony March 8, Random House author E.L. Doctorow, winner of the award for best novel, said Pantheon had been "beheaded," and noted that "even if no censorship was intended . . . the perceived effect is indeed to still a voice, to close a door against part of the American family." And one of the grand figures of American publishing, New Directions founder James Laughlin, another honoree at the ceremony, spoke with contempt of "this disgusting scandal" and of "the person responsible for this decapitation."

Last Monday, 40 editors and officials of Random House Inc. issued a highly unusual press release, calling the news coverage of the situation "misleading and inaccurate," and saying "there is no reason why Pantheon shouldn't live by the same fiscal rules as the rest of us at Random House and throughout the industry." Not everyone at the company agreed. "It struck me as a loyalty oath, a mistake and an insult to Pantheon," says one non-signer.

It's unprecedented for a book publisher to cause this sort of reaction -- even if Vitale dismisses the furor as "a small number of people" acting for reasons he says he finds mysterious: "You never know what triggers mass hysteria either."

Some of the reaction is rhetoric. There's no evidence anyone wanted Pantheon to tilt its list to the right; money is the concern here, not politics. And while Pantheon had published many good books over the years, it seemed to be a little too easily winning sainthood. Some of the titles most often mentioned in news reports -- The Leopard, The Tin Drum, Dr. Zhivago -- were issued decades ago.

More recently, there was some less essential material: decorating books, cookbooks, knitting guides and humor collections. While there were also important works by writers as varied as John Berger, Marguerite Duras, Eric Hobsbawm, Eduardo Galeano and Michel Foucault, Pantheon is probably being especially prized now for something more intangible: Unlike nearly every other house in New York, it never condescended to its audience by publishing trash fiction, books on building self-esteem or grapefruit diets.

Alberto Vitale, for his part, no doubt was brought to Random House to set its financial affairs in order. He also somehow let this particular situation get out of hand, and hasn't been shy about showing his anger to reporters. But it's useful to remember that Vitale's previous job was head of Doubleday; when he left that operation last fall, it was publishing many more good books than it had been when he started.

As for S.I. Newhouse: His critics note that even if Pantheon did lose as much as $3 million last year (its previous losses were much smaller), Newhouse has been amply rewarded for his investment in Random House. When he sold off its college division in 1988, he received $200 million -- almost three times the $70 million he paid for the whole operation in 1980. Newhouse's supporters say that in the 10 years he's owned Random House, he's left it alone more than the previous owner, RCA, would ever have done. In a way, that's the problem: People expected and believed that he would always do so. SO WHERE does the truth lie? About the only thing one can say with a fair degree of assurance is that the mess is a public relations disaster for the very proud employees of Random House. And that the whole story is sad -- despite the fact that Andre Schiffrin wasn't likely to win any popularity contests in the publishing world. Often regarded as difficult and abrasive, he had the virtue of being obsessed with books, and was devoted for three decades to a publishing house he didn't even own. Not many of his detractors could say the same.

Schiffrin's father -- a noted European publisher and founder of the famous Bibliothe`que de la Ple'iade -- was a very early partner in Pantheon. As a teenager in the late '40s and early '50s, Andre knew about the list the same way another boy would know the stock of his father's candy store. "We always thought Andre would be the right person to carry on," says Helen Wolff, whose husband died in 1963. "After his father's death, he took summer jobs at Pantheon. And I made a special point of sending him every single book Pantheon published. So actually there was an uninterrupted line."

Under the Wolffs, in the '40s and '50s, Pantheon and publishing were much different than they are today. It's not that people worried less about the bottom line; quite the opposite, in fact. But the relationship at least had a brutal immediacy to it. "Every book we published was like putting your head under the guillotine," says Wolff. "If it didn't sell, you couldn't publish the next one."

Andre Schiffrin, some of his colleagues complain, acted as though he had permission to lose money. The Wolffs never made that mistake. "We did not have the temptation that you have in a large and prosperous house to be more generous with yourself and others," says Wolff. Nor was there the bestseller mentality that tempts and traps so many publishers today.

When the couple started Pantheon, Kurt spent much of his time at the public library determining which important books had never been issued in this country. Then he took his initial capital of $7,500 and started publishing them. The first office was in their living room. Helen Wolff still complains about this, because it meant she had to constantly keep the place neat.

Now, her primary emotion is sorrow: "I'm deeply sorry to see that a gifted publisher who comes from such a publishing milieu, whose father was a publisher, who has devoted his life to books, should be treated as if he were a shirt-dealer." AT THE NBCC ceremony, Doctorow summed up by saying: "I would like to think that the parent company . . . will do the morally beautiful thing here: understand the creativity of the controversy that has developed, and declare its responsibility not only to its accountants but to the ideal of democratic discourse and the greater good of a free and literate society."

The management line is that it wants to do just that. "We never said Pantheon was going to be cut by two-thirds," protests Vitale. "I didn't present Schiffrin with any ultimatum. The only thing I asked him was to operate Pantheon in a financially responsible fashion."

It sounds reasonable, but then that's what corporations always say in cases like this. And as Victor Navasky -- editor of the Nation magazine, and both a Pantheon and Knopf author -- asks: "Why then would Andre resign, and six members of his editorial staff follow suit? Are they all suffering from some delusion, or is there something there?"

Susan Rabiner, one of the Pantheon editors, didn't quit immediately. First she heard management out. "My perception as I came out of the meeting was this is not a place I feel comfortable," she says, adding she believed management was committing itself to nothing except books with the imprint "Pantheon" on the spine.

Vitale, who labels the editors' resignations "mass psychosis," declares he is dedicated to more than that, and speaks of "a commitment on our part to maintaining the identity and tradition of Pantheon, and if possible to enhancing it." He gives no numbers. "We'll publish what we feel we can publish well. If I have 40 good books per season, I'll publish 40 good books. If I don't, I won't."

A new editor, Fred Jordan, has been installed at Pantheon. (He previously was executive vice president of Grove Weidenfeld, which, in a further irony, has lost so much money it makes Pantheon look like a piker). Jordan will report to the head of Knopf, Sonny Mehta, which may be the most hopeful sign: More than most people in publishing today, Mehta is interested in the kind of good books that everyone says they want Pantheon to publish. But it will take a long time and some very hard work before the present bitterness is forgotten.

Meanwhile, if certain things happen -- if the Pantheon list falls below 40 serious books a year; if Pantheon titles are no longer listed in a separate catalog but instead are presented as an appendage to the Knopf list; if it starts doing a preponderance of goofy or "non-book books"; or if it starts publishing presidential autobiographies instead of critiques of presidential power -- then the doomsayers will be proven right. By which point, of course, it will be too late to protest.