INTEREST RATES were at unprecedented heights six weeks ago. Since then, they have dropped with unprecedented speed.Earlier this month, the money supply was inexplicably dropping. Then it suddenly shot rapidly up last week. It's enough to drive a money-watcher to Dramamine. What's going on over there at the Federal Reserve Board, which presides over these mysteries?

The chairman of the board, Paul A. Volcker, in a speech last week, offered a sensible and useful view of the recent turmoil in the markets. He's very aware, he said, that to most people monetary discipline means nothing but high interest rates -- "pain and suffering." But in Switzerland, where monetary policy is tight to the point of frozen rigidity, you can get a mortgage at 4 percent. Mr. Volcker is making a crucial point. It wasn't restraint on the money supply that drove American mortgage rates up to 17 percent last winter. It was inflation, and the fear of worse inflation to come.

In a time of rising inflation, like last winter, borrowers try to borrow more, and lenders try to protect themselves by jacking up the rates. Finally, in mid-March, when the administration and the Federal Reserve Board swung into stronger attacks on inflation, the moment of panic passed. In April, evidence of a recession began to pile up faster than anyone had expected and, among borrowers, the herd psychology suddenly reversed. With business conditions deteriorating, a lot of people evidently decided, quickly, to cut their debts down. Interest rates dropped sharply and the flow of funds to business has once again picked up.

As the recession develops, Mr. Volcker fears, it may weaken the present political consensus on the balanced budget. If tax revenues fall and create a deficit, it will be seen to be temporary and no danger. But if the White House and Congress react as they have previously done, and start opening up all the spending valves, they will invite a devastating reaction. After last winter's experience, the financial markets are now on a hair trigger. Any hint of a spending surge will be taken as a sure sign of high inflation ahead and will set off another panic like last winter's in which interest rates choke off money to businesses and consumers alike.

The rules of the game have changed. This time the standard recession remedies and gestures -- the jobs bills, the public works bills, the widening of benefits -- won't work. A lot of people lost a lot of money in that astounding run-up of the interst rates last fall and winter. At any shadow of a suggestion of a repetition, their response will be immediate and uncontrollable. According to the text of Mr. Volcker's speech, he was addressing a bankers' meeting in Lake Buena Vista, Fla. That's wrong. He was speaking to the people in the White House and Congress -- and to the people who put them there.