William Hytche, chancellor of the beleaguered and predominantly black University of Maryland Eastern Shore, relaxed in his office here the other day and reminisced about the vagaries that threaten this institution from time to time.

"They've talked about making this place a chicken farm and they've talked about making it a prison farm. They'be talked about making it a junior college and they've talked about merging it with some other school. Now a legislative analyst says it should be shut down."

"This institution is so vitally needed. I am a strong advocate of preserving the black colleges, because so many of our students would not be in college at all if they were not here."

Hytche was reacting to a report prepared by a legislative budget analyst that argued that enrollment at the University of Maryland Eastern Shore (UMES) has shrunk to the point where continued operation is no longer economically justified.

Maryland's State Board of Higher Education, the report said, should consider closing the school altogether and relocate its faculty and students at other state colleges.

Predictably, the report drew a storm of criticism here both from college officials and from townspeople who fear the loss of its 300 jobs would severely damage the region's already depressed economy.

It raised a very real and serious issue that effects hundreds of colleges and universities throughout the country: as the pool of 18-year-olds begins to decline, what is to be done about rising costs and falling enrollments?

What the legislative study - by budget analyst John Donaldson found - was that per-student costs at UMES have risen to $6,631, the highest of any state college or university with the exception of the medical and professional schools of the University of Maryland at Baltimore.

In the last two years, the report noted, enrollment at UMES has fallen from 956 to 759, while at neighboring Salisbury State College - 12 miles away - enrollment has climbed from 2,248 to 2,599 in the same period.

All were put in a special program. Additionally, it noted, per-student costs at Salisbury State are $3,041, among the lowest in the state.

"UMES finds itself in the uncomfortable position of rising costs, decreasing ability to recruit, constricted by an out-of-state student limitation policy (15 per cent) and with less course offerings and facilities for its student body than its sister institution a short distance away," the report said.

"The evidence leads to the conclusion that the continued operation of UMES cannot be economically justified," it argued.

Disputing the contentions of the legislative study, Hytche and other faculty members here contend that UMES has only just began a long, slow process of self improvement and that, given time, it can develop into a first rate university.

Organized in 1886 as a high school for blacks, UMES was originally operated by the Centenary Biblical Institute and was known as the Delaware Conference Academy.

It did not come under state control until 1919 when the state college system took it over as the black land grant agricultural college, since blacks then were denied admission to the University at College Park.

For years, it was plagued by low academic standards and underfunding. With the outlawing of racial segregation in 1954, the existence of a black state college in Princess Anne and a white one 12 miles away in Salisbury developed into an increasingly embarrassing burr under the saddle of the state's college system.

From time to time suggestions have been advanced that UMES and Salisbury State be merged and that suggestion was renewed again this month by the Maryland NAACP. Appearing before the State Board of Higher Education, a spokesman for the NAACP asked the board to plan the merger, calling the present situation a "perpetuation of the dual system of higher education . . ."

In 1970, it was decided to resolve that situation by making the state college at Princess Anne a division of the university and integrating and upgrading it, but, as one university official put it, "it's been a long slow process."

"When we became an integral part of the university in 1970," says Chancellor Hytche, "we were given two very strong mandates: upgrade the faculty and improve the quality of the academic program."

"You can't do that overnight," Hytche said.

Nevertheless, he went on, since becoming the University of Maryland Eastern Shore, the percentage of doctorates on the faculty here has risen from 18 to 46 with most of the remainder having completed all their doctorate requirements but their dissertations.

Faculty members like Thomas P. Hopkins were brought in from the Univeristy of Connecticut to run the physical sciences department and Diann Showell from Ohio State to run a remedial program in reading, writing and math skills.

Of 250 freshmen tested last August, Showell said, 100 were found deficient in reading, writing or math. One girl, she said, had not read a single book during her entire four years of high school and a few of the students did not know their basic multiplication tables.

All were put in a special program aimed at improving their basic skills, she said, with the goal of bringing their skills up to college freshman level.

"The goal is that, when they get out of here, they will have an education equal to that of any of the other branches of the University" said science lecturer Norman Jensen.

"We don't always achieve it, but that is the goal."

Jensen added that one reason for the high per capita cost here is the high percentage of students needing remedial help.

Since becoming part of the University, the campus here has received several physical improvements including a $1.7 million Ella Fitzgerald Center for the performing arts, a $325,000 Olympic size swimming pool, a $2 million new student union building scheduled to open shortly, and a $1 million new science building.

The faculty has been substantially integrated with 36 per cent of faculty members white. By 1973, 33 per cent of the students were white.

While improvements were being made at UMES, they were also being made at nearby Salisbury State. Since the two institutions were run by different boards until last July 1, there was a fair amount of duplication of programs. On July 1, the State Board of Higher Education assumed responsibility for both the University and the State Colleges, but before then the two operated more or less independently.

Thus, for example, in 1973 the physical education program at Salisbury State was beefed up substantially, drawing students away, Hytche contends, from the physical education program at UMES. In 1973, he said, 38 per cent of the physical education stuents at UMES were white but with the improvements at Salisbury State that percentage now has fallen to 7 in physical education.

Since, 1970, the legislative report noted, six new academic programs have been organized at Salisbury State giving it a strong recruiting advantage over UMES where there have been no new academic programs in that period. Currently, the white enrollment at UMES has fallen to 23 per cent while Salisbury State stands at 92 per cent white.

Still, there remain students, both black and white, who prefer the smaller size and informal atmosphere of UMES.

Morgan Snyder, a white, transferred last summer from Salisbury State to UMES to study agriculture.

"I really like it down here," he said. "It's more peaceful and you don't have professors running out the minute classes are over. You have time to talk to them."

Albert Pimento, a black English major from Baltimore, said he chose UMES over College Park or Morgan State specifically because he was looking for a small school.

"I wanted a place where I would be a name, not a number," he said.