For two years, Evelyn Branham, a single mother on welfare, had a routine she'd follow the day she received her monthly allotment of federal food stamps. Branham would count her $290 worth of coupons and then hit the streets near her Northwest Washington apartment. Within hours, the mother of four says , she succeeded in trading $100 worth of stamps for $50 in cash or a fix of heroin from dealers or "anyone who would trade."

Branham says, and law enforcement officials agree, that her dealer most likely then took the stamps to a neighborhood grocery store, one of 220,000 businesses nationwide authorized by the federal government to exchange them for food. The dealer then sold the $100 worth of stamps for $75 in cash to a store proprietor, a transaction that netted the dealer a $25 profit.

A few days later, the store owner turned the stamps into a bank, which then redeemed the coupons at the Federal Reserve Bank for $100 in cash. In the process, the store owner was $25 richer without selling anything off his shelves.

The losers in this transaction are the taxpayers, who pay for food stamps; the federal government, which administers the multibillion-dollar entitlement program; and people like Evelyn Branham, who need the coupons to adequately feed her family.

Officials at the U.S. Department of Agriculture estimate that fraud costs the agency about 1.5 percent of the annual $14 billion food stamp budget. How much of that loss is fueled by drug trafficking alone is unclear, although officials say they believe the rate is increasing.

"I think it's a combination of things," said Rep. Ron Wyden, (D-Ore.), who last year held congressional hearings on food stamp fraud. "Drug dealers are getting more creative, and as law enforcement moves to shut down one route, another emerges. The fact is, this is a sector of our economy that is expanding, and it's part of the underground economy."

Several months ago, Wyden sponsored an amendment to the 1990 farm bill, recently signed by President Bush, that will strengthen penalties for food stamp trafficking. Wyden said he is concerned about what happens to the most defenseless sufferers in such scams: children, who represent more than half of the nation's 20 million food stamp beneficiaries.

"This is one of the worst forms of corruption I've seen, because it contributes to the drug problem and takes away food from children who have nothing else to eat. You hurt two generations of people," Wyden said.

Like many federal programs, the food stamp program has had its share of fraud and abuse since its inception in 1961. The program has long been a favorite target of conservative lawmakers who railed against "welfare queens" who somehow managed to bilk federal aid programs for luxury items.

But, USDA officials note, the most costly scams in the food stamp program often have originated or involved the federal employees assigned to monitor and distribute the coupons, not the poor who receive them. And even the most vociferous critics acknowledge that the food stamp program has helped feed tens of millions of Americans.

"The program is remarkably successful and makes a tremendous difference," said Robert Fersh, executive director of the Food Research and Action Center, a private, nonprofit organization that studies hunger. "But it is credible to me that a small minority use it for criminal purposes. I think it's a problem not so much with food stamps as it is with other social ills." Latest Skirmish in the War on Drugs

The problem of trading stamps for drugs or for money to buy them marks the latest chapter in the abuse of food stamps. Law enforcement officials and authorities in the USDA's Office of the Inspector General say that such incidents have proliferated in the past few years in cities as diverse as Kansas City, Albuquerque, Los Angeles and the District.

"Food stamps have been misused as long as they've been on the market," said Capt. Colin Younger, chief of the narcotics branch of the District's Metropolitan Police Department. "But in the past couple years, they've been feeding the drug trade in a number of large cities" including Washington.

"We have found {food stamps} being traded for guns, for boats, for everything," said William Galyean Jr., the regional USDA inspector general who coordinated the arrest of 39 people on charges of food stamp trafficking and drug-related violations in Washington and Baltimore last August.

"Food stamps are a second currency," said Galyean, "and drugs have become part of it. What you're seeing here is a taste of what is going on around the country."

The USDA's Food and Nutrition Service, which administers the food stamp program, began concentrating on the connection between drugs and paper food coupons two years ago as part of the Bush administration's war on drugs.

The number of prosecutions by the Office of the Inspector General -- although limited by the paucity of agents allocated to such investigations -- has increased from two cases in 1986 to 72 in 1989, the latest year for which statistics are available.

Branham says she stopped selling her food stamps in 1987, when she quit using drugs. Branham was never prosecuted for food stamp fraud, although she was arrested several times for writing bad checks and prostitution, the only other ways she says she knew to earn money for her drug habit.

Branham says, and law enforcement officials confirm, that the underground market in food stamps is a thriving business in her neighborhood, a cluster of mustard-colored brick townhouses that make up the development known as Sursum Corda off North Capitol Street.

'The Only Money They Have'

"For two years straight, I sold almost every food stamp I had," she recalled in an interview. "I got $290 in stamps every month, and the most the kids ever got for food was $90."

She says her arrest and imprisonment on a charge of writing bad checks sparked her rehabilitation; she received drug treatment in jail and says she now regards her participation in the food stamp underground as a kind of addiction itself.

"I was driven by my {drug} habit," she said. "And there were hundreds of people who would compete against me {to sell stamps}. You'd get into turf wars. And if you were trying to sell near the supermarkets, you'd have to watch out for guards throwing you off the property.

"Two times, I was caught by cops at Ninth and O streets Northwest" near a Giant Food store. "One time I started crying. I told the officer I had kids and needed the money, and he asked, 'If you have kids, why are you selling food stamps?' I said 'They need shoes.' And he went for it," she recalled, shaking her head slightly.

"The next time, it was another guy and he just said, 'Uh huh, yeah. That's not what you're selling it for.' And he was right."

Branham says she is not sure how her children, now ages 6, 9, 14 and 17, survived, because she was too preoccupied with her addiction to notice much back then. She says her own mother often stepped in, preparing food for her children and taking care of them.

Branham's story is not unique. Washington area social workers say that they know of other women who are coping with poverty and drug addiction and illegally trading food stamps because it is one of the few things with which they can barter. One 39-year-old District woman, who asked that her name not be published, said that for about three years she regularly sold her $326 worth of monthly food stamps for drugs and cash. She says she stopped last year when she kicked her heroin habit. The woman, who has seven children ranging in age from 7 to 22, is now working as a receptionist at a shelter.

"Most of the people I know and see now are pawning off the food stamps for cocaine," she said. "The main people I see are the women in shelters. Because if they have a habit, food stamps are the only money they have."

Drugs, Crime and Coupons

Last August, two D.C. library employees were arrested near Martin Luther King Jr. Library in the District for trading $1,605 in cash for $3,865 in food stamps; they were charged with trafficking in food stamps, a felony. The same week, a husband-and-wife team and an accomplice were arrested by federal agents in Southeast Washington on charges that they traded $49,000 in stamps for $15,000 in cash, a semiautomatic pistol and packets of cocaine. In mid-October, two District women were arrested in Northeast Washington and charged with trading $4,800 worth of food stamps for $2,000 cash and a .38 caliber revolver. All have pled not guilty.

In Baltimore, 32 people -- ranging from store owners to drug dealers who allegedly sold the stamps -- were arrested on separate charges, timed to coincide with the District undercover operations. The Baltimore probe linked store owners and clerks to the illegal sale of stamps.

The 220,000 stores qualified to receive food stamps are under the jurisdiction of the USDA'S Food and Nutrition Service, which like many federal social programs suffered budget cuts during the Reagan era. In 1978, the office had 63 investigators monitoring possible fraud. By last year, the number had dropped to 43.

Along with those investigators, about 160 other USDA staff members review applications from stores seeking to qualify as redemption centers and generally monitor operations. Officials say their enforcement and oversight efforts are overwhelmed. "We could use 10 times the number of people we have," said one senior USDA investigator.

In 1989, USDA officials examined 6,400 reports of possible fraud and stripped 1,900 stores of their status as food stamp redemption centers. The investigations stemmed from hotline complaints and analyses of redemption totals at stores to see which ones are returning suspiciously large numbers of coupons.

"We've made a conscious effort to put more emphasis on the connection between drugs and coupons," because of the Bush administration emphasis on drug-related crime, said Bonny O'Neil, assistant deputy administrator in charge of the food stamp program. "The program, to gain public support, needs to be providing food. And we just can't accept that a person can go in and get their food coupons and in a matter of minutes turn around and sell them for drugs."

It is relatively easy for a store to qualify as a food stamp redemption center, an essential step for a merchant located in a low-income area where many residents depend on stamps for food. The toughest requirement facing a prospective food stamp outlet is proving that half of the stock consists of staple items such as flour and milk.

Agriculture Department officials acknowledge that much fraud goes unchecked because of staff constraints. Both the USDA's Inspector General and the Food and Nutrition Service have asked for additional investigators in fiscal year 1992.

Law enforcement officials say that when they are able to prosecute cases of food stamp fraud, punishment has not been much of a deterrent.

"The problem is in the scheme of things, although the crime is terrible because of the people it preys on, food stamp fraud is a nonviolent crime and people are not going to get jail time for it," said Haven Kodeck, the assistant state's attorney in Baltimore, who recently prosecuted 32 people for food stamp fraud.

Among them was Michael Whitney, 25, of Baltimore, who was arrested Aug. 15 after police said he exchanged food stamps for heroin. According to court testimony, Whitney sold a confidential USDA informant four plastic bags of heroin worth about $50 each in exchange for $350 worth of food stamps.

Last fall, a judge in Baltimore ordered Whitney to serve a one-year suspended jail sentence, two years' probation, pay a $450 fine and make restitution of $350 for the stamps. Whitney's punishment was one of the stiffest sentences received by six defendants sentenced on misdemeanor charges on the same day last September for food stamp fraud. Whitney faced state charges in Maryland, rather than stiffer federal charges, because of the quantity of drugs and stamps he traded.

Under the new law recently signed by President Bush, prosecutors have the option of seeking tougher federal sanctions against those who commit food stamp fraud. Those convicted on federal charges of food stamp fraud will face penalities similar to those for money laundering: a 20-year maximum prison term and a $250,000 fine.

"We are in a year when the budget is being squeezed and squeezed and squeezed. It would seem that the first thing we would want to do is get the crooks out of it," said Wyden, who sponsored the legislation.

For Evelyn Branham, the cycle of food stamp fraud, drug addiction and hunger continues just beyond her doorstep, but without her participation. She proudly shows a visitor the eight boxes of cereal and a half-dozen chickens she bought with her recent food stamp allocation.

Some of her friends and neighbors, she says, are still selling their stamps to finance their drug habits. "I had a girl friend who would spend the food stamps right away, and her kids would go hungry for weeks and weeks," said Branham. "Finally, the city's protective services {department} took them away."