Two years after Francisco Franco's death, the world's worst fears that the dictator's passing would plunge Spain into chaos have proven wrong. But the buildup of long-frustrated hopes has raised the threat of future conflict and makes the country's budding democracy seem like a house of cards.

"At least when Franco was alive we lived with the hope that things would get better when he was gone," remarked a leftist Madrid housewife. "Now we have to assume all of his mistakes and fix them with a democratic system given to us by his heirs."

There is a widespread feeling that King Juan Carlos I, Francos 39-year-old successor, and Premier Adolfo Suarez, the monarch's 44-year-old political quarterback, have used democracy as a handy tool to make all Spaniards - regardless of political affiliation and social and economic standing - share the cost of Franco's dismal legacy and accept their terms and timetable for the final transition to full-fledged democracy.

The problem is that the average Spaniard is skeptical about the gift of democracy, and what it means to him. "Democracy, democracy," said a 54-year-old janitor. "Something sounds on the riverbed, but I believe it's more the noise of rolling stones than water."

This negative attitude toward Spain's much applauded democratic experiment has been reinforced by the performance of the parliament elected last June in the country's first free election in 41 years. The premier has avoided the legislature - where he has less than a majority - as a forum for debate and legislation. He has preferred to deal with opposition party chiefs for "pacts" to resolve the country's grave economic crisis and restore its lagging movement toward a democratic society.

The result has been a sharp popular disenchantment with parliament. Many Spaniards had hoped that after 37 years of dictatorship the politicians they elected as their representatives would make the legislature a battleground for their aspirations. Instead the Cortes has become a stage for personalities like Suarez, Communists General Secretary Santiago Carrillo, Socialist leader Felipe Gonzalez and conservative Manuel Fraga.

"Gonzalez has sold out," said an unemployed construction worker who voted for the young Socialist general secretary. "So has Carrillo. Next time out, if I vote at all it will be for the revolutionaries."

The quiet offstage dealings, the tame parliament and the government propaganda machine remind a great many Spaniards of Franco's way of doing things, and have raised questions about whether the king and the premier really understand the meaning of democracy.

"I am worried about this backroom technique," said a corporate lawyer who is a great admirer of Suarez. "It's a form of administered democracy, a dictatorship without a dictator. It's good for the Communists but it doesn't advance democracy and it establishes a bad precedent." Franco's Constitution

ONE REASON for the dullness of parliament is that there is still no new constitution, and the king and the premier retain near-absolute powers derived from Franco's constitution, which is still in effect.

There is a case to be made for the way Juan Carlos and Suarez are ruling Spain during the transition. They knew exactly how far and how fast they wanted to go, and realized that they had to stick to Franco's constitution to protect their own legitimacy until the new parliament approves the "democratic charter" just drafted by a committee of deputies.

After Franco's death, the king was faced with three choices:

1. To continue the dictatorship. He discarded this option but gave the task of reform to Carlos Arias, a Franco admirer and the dictator's last premier. But when he found that Arias was moving too slowly, he fired him and picked Suarez.

2. To throw out the dictatorship and establish a democracy by royal decree. He considered this alternative too risky because it involved not only his throne but the support of the military and the establishment.

3. The hybrid method that he and the premier have followed. This amounted to "grafting" a parliamentary democracy onto the institutions forged by the dictator. The idea was that this could be accomplished without any major upheaval.

From government public opinion polls, the king was quite aware that Spain had been ready for democratic changes long before Franco's death. The question was how to consolidate his own position so that he could keep his crown no matter what happened. He found in Suarez an able politician, a product of the regime who had an intimate knowledge of how it worked and how it could be changed.

"Suarez' great gift is that he is not ideological," said an aide. "He accepted the challenge and started running Spain."

His most important moves have been the legalization of the Communist Party and his removal of the military from the cabinet. He soon found that the armed forces ministers continually tried to block his reform proposals.

The premier was faced with a choice of either repressing the surging political parties which Franco had banned or yielding to the military. With the king's backing, he opened the way to the political parties. This was something not only demanded by the Spanish people but encouraged by Western Europe. The U.S. position of making haste slowly advocated by the Ford administration and former Secretary of State Henry Kissinger changed with the election of Jimmy Carter.

The dismantling of the worst features of the dictatorship was an easy task. There was no euphoria when Franco died, but neither was there great grief. The old dictator had become an embarrassment to the regime's younger generation, who longed to become a part of the West and to be accepted. Many had drafted proposals to reform the regime but found that there was no way so long as Franco lived.

The advent of Juan Carlos to the throne unleashed pressures for the recognition of political parties and for an end to the "wartime" military dictatorship which Franco had imposed in 1939, after his civil war victory.

The king, a product of the Spanish military, knew from the start that the senior officers were divided between those who wanted a limited democracy and those committed to prolonging the dictatorship indefinitely.

In the past two years he has eliminated the most blatant reactionaries. Whenever a vacancy came up int he hierarchy, he shifted open-minded senior officers into key command positions. He has not ended dissent, but he has taken firm command of the armed forces.

Grumbling in the ranks remains a matter of concern, but the military is not on the verge of a coup.What the military seem to crave is "authority" and "law and order" in the streets.

Another armed forces desire is for higher pay and modern weapons. The question is whether Spain, which is suffering a deep economic depression, can afford a modern, full-time defense establishment. Franco coddled his officers, but he also distracted them from their military demands by letting them moonlight in private and state industries to supplement their low salaries.

"The old generalissimo was shrewd enough to understand that if the armed forces are not engaged in military affairs all the time they can't conspire," said an army major. "We need professional armed forces, but we must have the money to keep them busy all the time. Otherwise they can become dangerous." An Economic Crisis

THE MILITARY'S demands for more money and equipment are part of Spain's overall problem. Everybody wants more. Teachers and parents are demanding more schoolrooms. The homeless are asking for dwellings, and when they don't get them they simply seize them.

Demands for higher pay have sparked wildcat strikes throughout the country for nearly two years. Wages in some cases have gone up 80 per cent. There are nearly 3,000 Spanish industries caught in a serious liquidity squeeze. Among them are state-run shipyards, a major steel company and other large manufacturers. The stock market is hovering near the bottom.

Walkouts have paralyzed Spain's airports. Neither the Socialists nor the Communists, who claim to control labor, have been able to halt stoppages which made the "Moncloa pact," the premier's economic compromise with opposition parties, a virtual dead letter. Inflation is running at a 30 per cent yearly rate, and Spain right now, despite its industry, has as much labor trouble as Portugal or Italy.

The Spanish economic miracle is over. A few nostalgic Francoists blame the economic downturn on Franco's death and the arrival of "democracy." But the causes are elsewhere - in the price of oil, in the low productivity and wage demands of Spanish workers, in the return of emigrants who have lost their jobs in Western Europe, in the failure of the government to take any drastic economic measures prior to the June election, and in a virtual end to the foreign investments which helped fuel the halcyon Sixties.

Spanish workers, who formed the core of resistance to Franco, can be extremely aggressive. Recently, striking employees walked through the public works ministry and were not shy about entering the office of the minister, Joaquin Garrigues, an Adam Smith liberal.

He picked up the phone and telephoned the interior minister, Rodolfo Martin Villa. Jokingly, he asked Martin Villa, who controls Spain's police, to send over a few men with machine guns because "I want blood on the walls." The minister's black humor is a sign of the frustrations of trying to be a democrat in the middle of an economic depression and a labor crisis.

Contributing to the crisis is a suicidal flight of capital which dates back three years to Franco's first serious illness and the revolution in neighboring Portugal. Since that time, experts estimate that more than $4 billion has been smuggled out of Spain and that the flight of capital continues unabated. Along with their pesetas, rich Spaniards are shipping out jewels and works of art.

Until recently, U.S. and European banks were helping big clients to get their money out. They arranged for couriers who literally ran a money railroad to Zurich. The big banks are now out of the business, but the money continues to run away because there is no confidence that a democratic system can find solutions to the crisis.

The urban middle class became rich under Franco, but had no faith either in the dictator or in the capacity of the Spanish people to govern themselves. They drive expensive foreign cars, own city and seaside apartments and ski lodges and want their children to speak French and English, but they are sending their money where it is safe.

They follow the crime rate with fascination.They comment on how bad strikes are becoming. They read the new income and inheritance tax laws with disdain. Like the bourgeoisie everywhere, they immediately conceive schemes to beat the tax collector.

"There is no civic sense," remarked a government deputy.

Some observers theorize that rich Spaniards feel a sense of guilt over the wealth they accumulated under Franco and fear that if the left should ever win an election, everything will be taken away from them.

"You know how socialists are," said a businessman who has millions banked abroad. "They'll nationalize everything and tax you out of existence."

Franco did not make any demands on Spaniards except that they stay out of politics. This created a great apathy toward anything that wasn't profitable, particularly in the dreary years of isolation following the civil war. Boys who grew up in Madrid stealing cooper from churches to sell in the flea market and exchanging foreign currency in the black market grew up to be today's industrialists, government officials and developers.

"We still have the sense that everything is transitory," said a businessman, recalling his boyhood. "That's why we eat so much, why we consume so much, and why we don't trust anybody." Hedonists and Revolutionaries

IN SHARP CONTRAST to the early post-civil war generation is today's youth. Spanish boys and girls have shucked the race for money. They wear jeans, and make love, don't believe in politics and politicians and want to make enough to have an apartment, a motorbike and a stereo, with something left over for hash. Marriage and children are not a goal. Neither is wealth.

Luis Miguel, 19, who makes enough for his needs, including pot, working as an itinerant electrician, put it this way: "I'm not interested in the king, in politics, in business. I had a bad education because the schools weren't any good, but all I want is to live as I want to."

Other young men and women, however, have opted for violence and for a pure kind of ideological radicalism. They are found in the extreme left and in the extreme right.Neither want to have anything to do with democracy. The extreme left denounces democracy as a continuation of Franco's "fascist state." The extreme right reviles democracy as treason to Franco.

Revolutionaries have left a long and bloody mark on Spain's barren soil. They are one of the government's main preoccupations. Whenever they kill a rightist leader or a leftist worker the government takes the stand that violence is aimed at Spain's emerging democracy.

This is an exaggeration, because violence has been a way of life in Spain for generations. It's not just the Basque separatist group called ETA, the Marxist-Leninist Liberation Movement or the Fascist Apostolic Anti-Communist Alliance, but a whole host of organizations whose members prowl around with guns and plastic explosives looking for targets.

Some of the rightist groups have cells inside the police system. The government has officially forgotten Franco, but in many barracks of the police and the paramilitary Guardia Civil the dictator's picture remains in the place of honor.

The government has repeated time and time again that one of its principal tasks is to reform the police so that they can become compatible with a democratic society. But the government retains most of the repressive laws of the dictatorship and can put them to use whenever they are needed.

"We don't know what the future holds," said an official. "We'll not use them unless we have to, but they are there. It would be a mistake to tie down the police and lose power in the streets."

For many Spaniards, power has in fact gone to the streets, where demonstrators challenge everything from rising prices to proposed housing projects, from dangerous street crossings to projected nuclear power plants, from amnesty to rights for homosexuals.

The sense that things are getting out of hand has revived the Franco cult despite a tacit understanding between the government and the opposition to ignore the dictator who left such a deep scar on Spain. Politicians may say that "it doesn't seem like two years but two centuries since his death," but for tens of thousands of Spaniards, "Franco is present."

Last Sunday there was no official ceremony to mark the second anniversary of "El Caudillo's" death, but 150,000 Franco fanatics turned out to mourn him and shout "Franco, Franco, Franco" under a driving cold rain in Madrid's Plaza de Oriente, where while alive he often harangued the Spanish people against the "danger of democracy" and the "evils of political parties."

The crowds not only hailed the past but berated the present and called on the government to resign.Among the were a large number of young people in the blue shirts of the Fascist Falange Party. All sang the Fascist hymn, "Cara al Sol" ("Face to the Sun") and raised their arms in the Fascist salute. Standing among them were Franco's daughter and grim young grandson.

Many dismissed the demonstration as mere "nostalgia," but rightist rallies are getting larger. Gold coins of Franco depicting the high points of his life are selling well, and so are plaques with his political testament warning the Spanish people to learn from their past. Throughout SPain there are signs saying, "Things were better with Franco." A menu in a restaurant patronized by opposition leaders had the following handwritten note: "With Franco prices were lower and the service faster."

King Juan Carlos did not ignore the anniversary. He attended a mass for Franco in Zarzuela Palace, the royal residence. Masses for Franco were held in his tomb in the Valley of the Fallen, the monument to civil war dead built by prisoners of war, and in military barracks. The dictator is still a powerful memory that haunts Spain along with the civil war and its million dead.

There are more lines to power now than in Franco's day, but they remain fragile. This is why there is so much polarization in Spanish soceity, and why Spain may be losing a historic opportunity to establish a Western democracy.

The Spanish press, which is reporting the transition with zeal and trying hard to be responsible and understanding, has yet to gain full freedom of expression. Publishers still must send copies of their publications to the censor for approval. Editors like Juan Luis Cebrian of Madrid's El Pais have many government cases against them.

Anarchism, once a powerful Spanish political force, is growing again. It is attracting young men and women who want no control, who are unhappy with the past and the present and prefer a utopia which rejects government. An Uncertain Future

THE DISTANCE between the "official" Spain and the "real" Spain is tremendous. While Catalonia has won limited self-rule, the Basque provinces are still negotiating for autonomy. The king and the premier scored a significant political coup in Catalonia, but the Catalans are less stubborn and more willing to concede than the Basques.

Municipal elections are a long way off - perhaps as far away as next fall. Meanwhile, thousands of Spanish cities continue to be run by municipal governments which came to power while Franco was still living.

The Socialists and Communists feel that the first real step toward democracy will come when the people finally get around to electing themen who will govern their restless cities. The government, however, wants to wait.

The reason is obvious. The premier's party, the Center Democratic Union, is divided. It must find 100,000 candidates who are moderate, loyal to Suarez and who can defeat leftist opponents. It is major problem for the premier, who knows that there is no real centrist party in Spain. His CDU, formed only last April, is an alliance, of convenience between small parties which wanted to ride on his coattails.

The loss of the municipal elections by Suarez, who is beginning to stump the provinces, would open the way for the Socialists to go into real opposition and push for the premiership and the right to govern.

With nearly 30 per cent of the electoral vote behind them, the Socialists add up to Spain's largest and most homogenous party. There are divisions in the paty, but they are normal. The animosity between the Socialists and Communists, and the apparent understanding between Carrillo, the Communist leader, and Suarez both help the Socialist position, particularly in the big cities.

The future is hard to read because there are so many amorphous forces at play in Spain. The transition, for instance, was forged with a view to keeping reformers schooled in the Franco regime rotating power for the next decade or so. But events set in motion by the king and the premier and an economic crisis have made it possible that a socialist like Gonzalez may come to power sonner than anyone expected.

Are the Marxist Socialists who still uphold republican ideals ready to rule SPain under a king? For the moment, the answer must be that they are. They hav no links to the dictatorship, and they could turn parliament into a creative legislature, complete with debate on issues and a program ranging from education to abortion and divorce.

There is no question that Gonzalez has been preparing to govern. He has discussed his views with generals, businessmen, and with Western European and U.S. political and business leaders. He has no administrative and no executive experience, but neither did Suarez.

Whether Suarez remains in the premiership or has to yield it, Juan Carlos is assured that the monarchy will remian. The Spanish people are aware that without the king the whole system will break down and the country will once again be split into winners and losers.

"The monarchy represents stability," said a Socialist. "I'm a republican, but I must recognize that without Juan Carlos we would not be in parliament today."